Individual Savings Accounts (ISAs) offer savers the opportunity to invest without paying income tax on earned interest, or capital gains tax. These benefits make them a particularly favourable route to take to save and in many cases, the benefits can extend past death, too. But what exactly are the rules for inheriting an ISA?
Can people inherit ISAs?
According to Todd Wootton, private client specialist at accountancy firm, Menzies LLP, anyone can inherit the proceeds of an ISA “but will inherit its value, not the wrapper itself”.
However, a spouse or civil partner can inherit the ISA and continue its tax-free status through an Additional Permitted Subscription (APS), also known as an inherited ISA allowance.
Prior to 2015, ISAs could be passed on to beneficiaries named in the person’s will but automatically lost the tax-efficient ‘wrapper’.
Daniel Boyle, private client lawyer at Freeths, said that this means that now, “any ISA funds transferred as an APS keeps its tax-free status and counts as a one-off ISA allowance that’s granted to the surviving spouse or civil partner for that tax year only.
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“For example, if your partner had £50,000 in ISA savings, your ISA allowance for the year would be £70,000 (the value of your partner’s savings and your own ISA allowance for the 2022/2023 tax year, which currently stands at £20,000).”
However, there are still benefits to be claimed, even if the ISA isn’t left to the surviving partner.
Mr Boyle continued: “If the deceased leaves the money in the ISA to someone else, the surviving partner is still entitled to an increased allowance for that tax year that’s equivalent to the value of the ISA assets.
“The rules mean that the tax efficiency of the deceased’s ISA won’t be lost and that the surviving partner will be able to enjoy the tax advantages they previously shared with their partner.
“This means the vehicle can be a useful source of tax-free income in later life for the surviving partner.”
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But, it’s important to note, the spouse or civil partner must have been living with the deceased at the time of their death.
What if the ISA value increases after death?
Prior to April 6, 2018, the value of the APS was the value of the ISA at the date of death – but this has since changed.
Andy Pennie, managing director at Intelligent Pensions, said: “Since April 6, 2018, the concept of a ‘continuing ISA’ was born, which allows the ISA to maintain its status until the earliest of three things.”
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The laws of intestacy refer to when a person dies without leaving a valid will, which means their estate (money, property, assets) will be distributed according to certain rules.
Mr Moore continued: “Claiming an APS and exploring the options available to you can be a complex process, so where possible you should seek professional financial advice to help ensure you make the right decisions.”
It’s important to remember, however, that ISAs passed to anyone other than a spouse or civil partner after death, are liable to inheritance tax (IHT).
Max Sullivan, wealth planner at Kingswood told Express.co.uk: “ISAs are only ISAs during one’s lifetime, on death, they are liable to the HMRCs coffers. Therefore, legacy and intergenerational planning are fundamental.”
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