Individual Savings Accounts (ISAs) are one of the most tax-efficient ways to save or invest, and many people want to pass on their accounts to loved ones when they die.
Since 2015, it’s been possible for married couples and civil partners to inherit an ISA allowance from each other.
But how exactly does this work in practice? In this article, we explore what happens when your spouse or partner dies with an ISA, how this affects your own ISA allowance, and what you can do with their savings.
Contents
- What is an ISA?
- What happens if my spouse or civil partner dies with an ISA?
- What happens if my spouse or partner’s ISA savings grow after they die?
- How do I claim an inherited ISA allowance?
- I’ve inherited my partner’s ISA savings – should I reinvest them?
- How does inheriting a stocks and shares ISA work?
- Can an ISA be left to someone else?
- Do you have to pay Inheritance Tax on an ISA?
What is an ISA?
In simple terms, an Individual Savings Account is a kind of tax-efficient wrapper that protects your returns from tax. Any growth on savings or investments held in an ISA won’t be subject to income tax, and any profits reaped from selling investments in an ISA aren’t subject to Capital Gains Tax (CGT) either.
The most common types of ISA are stocks and shares ISAs – which are used to hold investments – and cash ISAs, which are used to hold cash like a conventional savings account. There are also innovative finance ISAs, which invest in peer-to-peer lending.
Everyone has an annual ISA allowance that dictates how much you can deposit into ISAs each tax year. In the 2023/24 tax year and the 2024/25 tax year, the annual allowance is £20,000. You can hold more than one ISA, but you cannot pay into more than one of the same type of ISA each tax year. That means for example, if you wanted to, you could pay £10,000 into a stocks and shares ISA and £10,000 into a cash ISA, but you couldn’t pay £10,000 into a cash ISA with one provider, and £10,000 into another cash ISA with a different provider. However, this rule is set to change from April 6, 2024, when you’ll be able to pay into more than one of the same type of ISA if you want to.
If your spouse or civil partner dies with an active ISA or ISAs (i.e. an ISA or ISAs that they were paying into in the current tax year) you may be eligible to inherit an increased ISA allowance from them. We explain how this works below.
What happens if my spouse or civil partner dies with an ISA?
If your spouse or civil partner holds an ISA when they die, then you can’t inherit the account itself, but you can inherit the money in it. Like any other accounts held solely by them, it will be closed during or at the end of probate. You may receive their savings if they have opted to leave them to you in their will.
However, you will receive an increase to your annual ISA allowance – for that tax year only – equivalent to either the value of their ISA savings when they died, or the value of their ISA when the account is closed. This is known as an inherited ISA allowance or ‘additional permitted subscription’ (APS).
So, for instance, if your spouse dies with £50,000 in their ISA, then you’ll have your own £20,000 allowance for the year and an additional permitted subscription of £50,000, meaning your tax-free allowance for that year would be £70,000.
You can get the additional permitted subscription regardless of what your spouse says in their will. Even if they leave their actual ISA savings to someone else, you as their spouse or partner still inherit the allowance (though of course, without the money, you would have to invest your own funds).
Under previous rules, ISA savings could be passed on in your will but would lose their tax-free status, meaning even if your spouse inherited your savings, they would only be able to reinvest their annual allowance tax-free. These rules were changed in April 2015.
What happens if my spouse or partner’s ISA savings grow after they die?
Thankfully, since 2018, any growth that an ISA undergoes after the person dies is known as a ‘continuing ISA’, and remains tax-free as well.
Your ISA only ends either when the executor or executors of your will closes it, or the administration of your estate is completed. Otherwise, your ISA provider will close your ISA three years and one day after you die.
There won’t be any Capital Gains Tax to pay up to that date, but ISA investments will form part of your estate for Inheritance Tax purposes.
Sorting out someone’s estate when they die can take months or even years, so this rule prevents you from having to pay tax on any growth in your spouse’s savings or investments during this period.
If the value of your spouse’s ISA investments go down during probate, the value of their savings from when they died is used instead. Essentially, it’s whichever value is higher, so it benefits you either way.
You can’t pay more money into the ISA of someone who has died, however.
How do I claim an inherited ISA allowance?
You can apply to claim an inherited allowance from your spouse or partner’s ISA provider.
You’ll need to contact them to let them know your partner has died and supply them with the information they require. This usually includes their name, address, National Insurance number, date of birth, date of death, the date of your marriage or civil partnership, and death certificate. You’ll also need to confirm that you were living together at the time of death – if you were living separately, you may not be able to claim the allowance.
They’ll then let you know how much your partner’s ISAs are worth and you can register your inheritance allowance with them.
This doesn’t mean you have to keep the money with the same provider, however – we touch on what you can do with any ISA savings you inherit in the next section.
You can apply for an inherited allowance up to three years from the date of death, but if it takes longer than this to sort out their estate, then the deadline is 180 days after probate is completed.
I’ve inherited my partner’s ISA savings - should I reinvest them?
If you have inherited both a larger annual allowance from your spouse or partner and their ISA savings, it’s up to you whether you choose to reinvest the money or not.
If you do decide to invest, it’s your choice whether you want to stick with your spouse’s provider or pick a new one. You can save the money into a cash ISA, or invest it into a stocks and shares ISA or an innovative finance ISA.
Under the usual ISA rules, you can only open and pay into one of each type of ISA each tax year, although this will change on April 6, 2024. However, there is an exception if you open up an ISA for the sole reason of transferring inherited savings to it. So you could, for example, open one cash ISA for your own savings and open a new one for the savings you’ve inherited in the same year, for instance.
However, bear in mind that not every ISA provider accepts savings made as part of an inherited allowance, or they may offer ISAs specifically designed for these kinds of transfers – these are sometimes called spousal ISAs or APS ISAs. A few providers stipulate that your spouse must have been a customer with them before they died in order to carry out a transfer with inherited ISA savings.
Once the transfer has been completed, the money is treated under normal ISA rules.
If you want personal recommendations about where to invest, you’ll need to seek professional financial advice.
You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide on How to find the right financial advisor for you.
How does inheriting a stocks and shares ISA work?
If your spouse held investments in a stocks and shares ISA, you have two main options. First, you can sell the investments held in the ISA and, if you wish, transfer the proceeds into a cash ISA – this is known as a cash transfer. Alternatively, you can transfer the investments as they are to a new stocks and shares ISA, which is known as an ‘in specie’ transfer.
Bear in mind you only have 180 days from receiving the investments to make an in specie transfer, and they must be transferred to an account from the same provider.
Can an ISA be left to someone else?
Savings from an ISA can be left to anyone, but only the spouse or partner of the person who has died can inherit an increased allowance specifically.
Do you have to pay Inheritance Tax on an ISA?
When you die, any part of your estate that exceeds the current £325,000 Inheritance Tax (IHT) threshold and is left to your spouse or civil partner, will be automatically exempt from IHT, including savings in an ISA.
However, if you leave your ISA savings to someone other than your spouse or civil partner, they will be considered part of your estate, meaning they may be subject to Inheritance Tax.
In other words, ISA savings are only exempt from income tax and Capital Gains Tax (CGT) specifically, but they are still subject to IHT.
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