What Happens to Your ISA on Death? A Guide for Your Estate Planning
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There is a risk to your capital and you may not get back the full amount invested. The value of investments, as well as the income from them, can fall as well as rise.
While ISAs offer valuable tax benefits during your lifetime, it’s also important to understand how they’re treated after death, especially if you want to minimise complications for your beneficiaries. This post covers what an ISA is, what happens upon the account holder’s death (including the post-2018 “continuing ISA” rules), the probate process, and the benefits and drawbacks involved.
What is an ISA?
An ISA, or Individual Savings Account, is a tax-efficient way to save or invest in the UK. Each tax year, adults can save up to a set limit in an ISA, currently £20,000 for the 2024/25 tax year. There are different types of ISAs (Cash, Stocks & Shares, Innovative Finance, and Lifetime ISAs), each offering different investment strategies and features.
One of the biggest attractions of ISAs is that any income or capital growth within them is free from income tax and capital gains tax.
What Happens to an ISA When the Account Holder Dies?
HMRC introduced a key change in 2018 allowing ISAs to become ‘continuing ISAs’, preserving their tax benefits for a limited time after the account holder dies.
Here’s what happens under current rules:
1. Continuing ISA Status: From the date of death, the ISA becomes a “continuing ISA” and retains its tax-free status during the period of estate administration or for up to three years, whichever comes first. During this time, the investments or savings held within the ISA can still generate tax-free income and growth
2. End of Continuing ISA Period: The ISA ceases to be a continuing ISA either:
o When the account is closed
o When the estate is fully administered
o On the third anniversary of death, whichever is sooner
After this point, any remaining funds lose the ISA tax protections if not already transferred.
3. Probate and Access: During probate, the ISA funds form part of the deceased’s estate and cannot be accessed until probate is granted. Any ISA assets, such as cash or investments, are distributed according to the will or intestacy laws.
The Additional Permitted Subscription (APS) Allowance
One of the most valuable estate planning features introduced in recent years is the Additional Permitted Subscription (APS). This allowance enables the surviving spouse or civil partner to inherit the ISA tax benefits of the deceased.
The APS allows the survivor to make a one-off additional ISA contribution equal to the value of the deceased’s ISAs at the date of death. This is in addition to their own annual ISA allowance.
For example, if the deceased had £50,000 in ISAs, the surviving spouse can contribute up to £50,000 into their own ISA as an APS, even if they didn’t inherit the ISA assets themselves.
Benefits of the Current ISA Rules on Death
1. Continuation of Tax Efficiency: The continuing ISA rules allow tax-free income and growth to persist for up to three years after death.
2. Transfer of Tax Benefits to a Spouse: APS provides a straightforward mechanism for a spouse or civil partner to preserve the ISA’s tax advantages.
3. Estate Planning Simplicity: ISAs remain relatively simple products, and the APS helps minimise disruption during a difficult time.
Drawbacks and Considerations
1. Inheritance Tax (IHT): Despite tax-free growth, the value of the ISA is included in the estate and may increase the inheritance tax liability, depending on the total estate value.
2. Access Delays: Like other assets, ISA funds are subject to the probate process. This can delay the ability of beneficiaries to access the money or investments.
3. APS Application Can Be Complex: Different ISA providers have their own APS processes. The surviving spouse must claim the APS allowance within three years of the date of death or 180 days from completion of estate administration, whichever is later.
4. No APS for Non-Spouse Beneficiaries: Children, siblings, or other beneficiaries cannot use the APS, meaning the ISA tax advantages are lost for them once the continuing ISA period ends.
Preparing for ISA Transfer on Death
If you hold a significant ISA balance, you can make things easier for your loved ones by considering the following:
· Make a Will: A valid, up-to-date will ensures your ISA is passed according to your wishes and helps streamline the probate process.
· Discuss APS with Your Partner: Ensure your spouse or civil partner is aware of the APS and how it works so they can claim it in time.
· Review Estate Planning Strategies: If you are concerned about IHT, consider including ISAs as part of a broader estate plan. For instance, AIM ISAs (invested in qualifying shares on the Alternative Investment Market) may qualify for Business Relief, offering IHT mitigation, although they carry a higher level of investment risk and require advice.
Final Thoughts
Understanding what happens to your ISA on death and how the rules changed in 2018 is vital for effective estate planning. While ISA tax benefits do not continue indefinitely, the continuing ISA period and the APS allowance now provide more generous and flexible options for spouses and civil partners. With proper planning, your ISA can remain a valuable part of your legacy.