Inheritance ISA: What you should know

For years, ISAs have been the go-to tax wrapper for UK savers, offering a neat way to grow your money without HMRC taking a bite. But here’s the twist that catches many off guard: while ISAs are tax-free in life, that protection doesn’t always stick around after you’re gone.

Suddenly, terms like ISA inheritance tax and stocks and shares ISA inheritance tax start cropping up, and the waters get murky fast. If you’ve built up a decent pot in your ISA or expect to inherit one, there are some key rules you’ll want to know. 

Let’s break it down, demystify the jargon, and help you get ahead of the curve.

How are ISAs treated after death?

ISAs are famously tax-efficient… while you're alive. But once the account holder passes away, that tax-free bubble bursts. The value of the ISA becomes part of the estate, which means it could be subject to inheritance tax, especially if the estate tops the £325,000 threshold.

It’s a bit of a gut punch if you assumed your ISA would quietly pass on untouched. After death, the ISA stops shielding your money from income tax and capital gains tax, unless it’s converted into a “continuing ISA” during the estate administration process. Even then, the clock’s ticking.

And unless the person inheriting it is your spouse or civil partner, the tax perks end right there. But that’s not the end of the story, because the UK has one interesting trick up its sleeve for couples who plan ahead.

The APS allowance

Here’s where things get more hopeful. Since 2015, the Additional Permitted Subscription (APS) has made it possible for surviving partners to keep the ISA benefits rolling.

The APS is a one-time ISA boost. If your spouse dies with £50,000 in their ISA, you, as their partner, can get an extra £50,000 allowance on top of your own annual ISA limit. It’s a clever workaround that ensures couples don’t lose years of tax-free growth just because one partner passes.

But don’t mistake it for an automatic transfer of the ISA. APS is more like a bonus subscription allowance that needs to be claimed. There’s paperwork, and there’s a time limit (usually three years). But if done right, it can make a massive difference in shielding your inherited savings from tax.

And yes, this only applies to spouses and civil partners. If you’re leaving your ISA to your kids or anyone else, different rules apply (and we’ll get to that).

Stocks and Shares ISAs and inheritance tax: What you need to know

A stocks and shares ISA might feel like a longer-term, more strategic play than a cash ISA, but inheritance tax doesn’t care. So, if you’re wondering what is the best ISA to invest in UK for both growth and tax efficiency, it’s important to consider how inheritance tax rules apply.

When it comes to stocks and shares ISA inheritance tax, the story is much the same. The value of the account goes straight into your estate, and if your estate’s value tips over the threshold, inheritance tax could bite, regardless of whether your ISA was full of tech stocks or blue-chip dividend darlings.

There’s also a practical quirk here: the market doesn’t pause for probate. The value of a stocks and shares ISA can swing between the date of death and the moment it’s cashed out. That can shift the IHT liability and change what beneficiaries actually receive.

So, while these ISAs are brilliant vehicles in life, they need careful planning if you want to keep the taxman at bay in death.

Who inherits your ISA and what do they actually get?

Unless you’re married or in a civil partnership, the person inheriting your ISA is going to get the money, but not the tax benefits.

They can take the assets or cash, but they’ll be pulled out of the ISA wrapper, and from that point on, any interest, dividends, or capital gains could be taxed. That means your £60k stocks and shares ISA might end up as a normal investment portfolio in someone else’s hands with none of the shielding you worked so hard to maintain.

This makes it absolutely crucial to have a will that clearly states who gets what. If you die intestate, the default legal rules might not reflect your wishes, and they certainly won’t optimise for tax efficiency.

How to minimise ISA Inheritance Tax

So, how do you avoid the ISA tax trap?

First, make the most of the APS if you're married or in a civil partnership. It's one of the few ways to pass on an ISA’s tax advantages. Don’t wait until it’s too late and make sure your partner knows how to claim it and that your ISA provider is looped in.

Second, consider the bigger estate picture. If your estate (including your ISA) is nearing the inheritance tax threshold, it might be worth exploring options like lifetime gifting, charitable donations, or trust planning. While ISAs themselves can’t be put directly into trusts, overall estate strategy matters.

Lastly, don’t leave it all to chance. Speak with a financial adviser or estate planner who understands both ISAs and inheritance tax. A little forward-thinking can go a long way in protecting your wealth and giving your loved ones less to stress about when the time comes.

Final thought

ISAs are a brilliant tool for tax-free growth, but the story doesn’t end when you do. Whether it’s a cash ISA or stocks and shares ISA, inheritance tax rules can sneak in and change the equation if you’re not prepared.

That’s why it pays to understand how ISA inheritance rules work, especially the role of the Additional Permitted Subscription for spouses. For everyone else, it’s about clear planning, smart estate management, and knowing exactly how your savings will be passed on.

So, don’t leave it up to guesswork. If your ISA’s worth protecting in life, it’s worth planning for after it too.

FAQs

Can I inherit an ISA from someone I’m not married to?

You can inherit the funds in their ISA, but you won’t get the tax-free status or the Additional Permitted Subscription allowance. The ISA will be closed, and the assets transferred to you as regular savings or investments, potentially subject to income tax or capital gains tax.

What happens to a Lifetime ISA when someone dies?

A Lifetime ISA (LISA) also loses its tax-free wrapper upon death. The funds become part of the estate and may be subject to inheritance tax. Any withdrawal charges (like the 25% penalty) are waived, so the full balance is passed on to the beneficiaries before tax considerations.

Is there a time limit for using the Additional Permitted Subscription (APS)?

Yes. You usually have three years from the date of death to use the APS allowance, or 180 days after the estate is fully administered, whichever is later. Missing the deadline means losing the right to claim that extra ISA allowance, so don’t delay the process.