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Is inheritance tax payable on ISAs?

There is a lot of confusion in the UK about how ISAs are inherited, whether they retain their tax-free status and whether they are subject to inheritance tax.  Here we explain how ISAs are inherited.  

Last updated on August 13th, 2019 at 08:50 am

What is an ISA?

An ISA is an individual savings account (or investment account) that can be used to save without paying tax on the interest earned.  You can only open one ISA per year and invest in it an amount up to your annual ISA allowance, which in 2017/2018 is £20,000.  There are several types of ISA.  The main ones are:

  • cash ISA – like a normal savings account but you will not pay any tax on interest earned. Usually you will have to give a certain amount of notice to withdraw the money.
  • instant cash ISA – like a cash ISA, but with the ability to withdraw money throughout the year. The interest rate is usually variable.
  • fixed rate cash ISA – like a cash ISA but you must invest your money for a certain amount of time, usually one to five years, and you are unable to withdraw it during that time. The investment often has to be made as a lump sum and the interest rate is higher.
  • regular savings ISA – you pay monthly into an ISA, up to £1,666 per month, which is equivalent to the annual limit of £20,000. Interest is fixed over a certain amount of time.
  • ‘Help to Buy’ ISA – a way of saving for a first home. The government will boost savings by 25%, adding £50 to every £200 saved (the maximum you can deposit per month).  The maximum government contribution is £3,000.
  • lifetime ISA – can only be opened by someone aged 18-40, but you can save until you are 50. This type of ISA can be used for a deposit on a first home or for retirement (aged 60), when you can withdraw the cash – tax free. You can save up to £4,000 a year and the government will add 25%, so up to a maximum of £1,000 a year.

Other ISAs include:

  • stocks and shares
  • innovative finance
  • mini ISAs

How are ISAs inherited?

Since April 2015, if you are married or in a civil partnership, your spouse or civil partner can inherit your ISAs when you die without losing their tax-free status.

This is because, when you die, no matter who you leave the cash in your ISAs to, your spouse or civil partner will be allowed an ‘additional permitted subscription’ (APS). This gives them a further ISA allowance equivalent to the amount you leave in your ISAs.  So, if there is £60,750 in your ISAs (including interest) when you die, your spouse or civil partner will be able to make an investment of the same amount into an ISA of their own (some time limits apply).  This is in addition to their own ISA allowance (currently £20,000 for 2017/2018).  In effect, when you die, your ISAs do lose their tax-free status, but your spouse of civil partner is given a further ISA allowance of an equivalent amount in which they can save the money, tax-free.

If your ISAs pass to anyone other than your spouse or civil partner, they will not retain the tax-free status.

Anne Rogers Is inheritance tax payable on ISAs

Anne Rogers, head of the wills and probate department

Is inheritance tax payable on ISAs?

As with all assets, if you pass your ISAs to your spouse or civil partner when you die, they will not pay inheritance tax (IHT) on them.

However, if you leave money, including that in your ISAs, to anyone else when you die, that money will be subject to 40% inheritance tax if the value of your estate is over the current IHT limit of £325,000.

When you die, your spouse or civil partner inherits your IHT limit, so when they subsequently die, their IHT limit is doubled – currently to £650,000.  Beneficiaries of the estate will pay IHT on any amount inherited above this limit.  The tax-free status of any ISAs will be lost.

If you want to speak to someone about how to leave your estate when you die, please contact our experts, or find out about making a will on our web site.

 

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