Can ISAs be Inherited?

POSTED ON Friday, 09 October, 2020

ISAs are an excellent way to save or invest, all while keeping the returns from interest or investments safe from the tax man. Your early allowance for 2020/2021 allows you to put up to £20,000 away each year in order gain tax-free returns. However – what happens to your ISA when you pass away? Is it subject to inheritance tax should you leave your ISA to your loved ones? We’ve broken down what you need to know here.  

ISAs are an excellent tax-efficient way both to save your money and to invest your money. The main benefit of an ISA is that you can save or invest up to £20,000 for this tax year and the returns you gain on this are not subject to capital gains tax or income tax. This is because ISAs are a government initiative designed to encourage people to save and invest.

However, just because it is tax-efficient method of saving does not mean that ISAs are exempt from all taxation in all situations. One very common way that taxes do affect ISAs is the application of inheritance tax in the instance of the ISA holder’s death.

What is inheritance tax?

Inheritance tax is a kind of tax which is paid on an individuals estate following their death.

Inheritance tax applies to the whole of the estate owned by the individual – which includes the total value of the property, money and possessions owned by the deceased individual, which is payable to HMRC.

Inheritance tax applies only to estates which have a value grater than £325,000.

There are exceptions to this which include: leaving your entire estate to your spouse, civil partner, to a charity or a community organization such as an amateur sports club.

The current standard inheritance tax rate stands at 40%; and this is only charged on the amount which exceeds the thresholds.

ISAs and Inheritance Tax

Emphatically, ISAs are still subject to inheritance tax (IHT), but there are some exemptions to this.

For example, if the recipient of the ISA upon death is the spouse or civil partner of the deceased individual, then the ISA is exempt from inheritance tax due to what is known as the spouse exemption.

In the time period when an estate is being administered (meaning, the time between the individuals death and the transference of the inheritance), the ISA in the deceased name will continue to gain returns or interest.

The basic facts you need to know about ISAs and Inheritance Tax are…

  1. During the holder’s lifetime, ISAs are not subject to income tax or capital gains tax
  2. Subject to certain time limits, ISAs continue to gain interest and remain exempt from income or capital gains tax during the administration of the deceased estate.
  3. ISAs are subject to IHT, unless they are bequeathed to the spouse or civil partner of the deceased (who is still alive).
  4. Any surviving spouse/civil partner will then get the equivalent in ISA allowances to the value of their ISAs, beginning from the date of the death of the spouse.

Other Options

If you’re concerned about making sure that your children received your ISA, it might be worth instead opening a JISA for them, if they are under the age of 18.

That account will be opened by you, but will be in their name.

This means that there will be no issue with inheritance of that money upon your death as it is not your money, but theirs.

However, the best course of action if you are concerned about leaving your estate to your loved ones is to get in contact with an inheritance tax specialist and ensure that your will is in order.

Read more about ISAs here.