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Are ISAs subject to inheritance tax?

Discover whether ISAs are subject to inheritance tax, how they’re treated upon death, and what steps you can take to protect your savings.
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Reading time: 5 mins

Individual Savings Accounts (ISAs) are appealing to many because of their tax benefits. That’s why, when it comes to big picture planning, it’s natural to wonder how these tax exemptions might translate in terms of passing on inheritance.

Everyone wants the best for their loved ones, so it’s natural to want to leave them something when you’re no longer here. But there is Inheritance Tax (IHT) to think of, which refers to the tax deducted from the total value of a person’s estate after they’ve passed away.

For those with ISAs – which are available in different forms, and shelter returns from income and Captial Gains Tax (CGT) – it may not be entirely clear how these accounts are valued after death.

You might be wondering:

“Are ISAs exempt from IHT? If not, why?”

“Can ISA savings be passed onto loved ones?”

“How are Junior ISAs classified within my estate?”

Well, you’re not alone. That’s why we cover the answers to all these questions and more in this guide to managing ISAs and inheritance tax.

What is inheritance tax and when does it apply?

When someone dies, their money, property, possessions, and investments are valued together, to form what's known as their “estate”.

In the UK, Inheritance Tax (IHT) is a tax that may be charged on this estate before it's passed on to beneficiaries.

However, while it can be significant in certain cases, it's worth noting that only a small percentage of estates – around 1 in 20 – are large enough to be liable for IHT.1

How does inheritance tax work?

Inheritance Tax is typically paid out of the estate itself, by the executor (if there’s a will) or the administrator (if there isn’t). Typically, it isn’t paid by the beneficiaries directly – unless specific arrangements have been made in the will or through gifting.

The standard rate of IHT is 40%, but this only applies to the value of an estate above a certain threshold. That threshold, known as the nil-rate band (NRB), is currently set at £325,000 and will remain at this level until 2030. If the total value of the estate is below this figure, no IHT is due.2

There are also important exemptions and allowances to be aware of:

  • If everything above the threshold is left to a spouse, civil partner, a charity, or a community amateur sports club, no tax is due.
  • If you leave your home to your children or grandchildren (including stepchildren, and adopted and foster children), the threshold can increase by up to £175,000, known as the residence nil-rate band (RNRB), bringing the total possible allowance up to £500,000).
  • If you’re widowed or a surviving civil partner, you may be able to inherit any unused threshold from your partner’s estate. This can double your combined tax-free allowance to £1 million (for example, £325,000 + £175,000, times two). It’s important to note that this is a ‘combined potential allowance’ and not a guaranteed amount for every couple, as individual circumstances can vary. These figures are based on the tax year 23/24 and, while current thresholds are expected to remain unchanged until 2030, it’s worth keeping this in mind when planning for the future.

Are ISAs subject to inheritance tax?

ISAs provide a tax-efficient way for people to save and or invest to grow their money, which is why many opt to open an ISA (or ISAs) - choosing the type, or types, which align with their financial goals and needs.

But while interest, dividends, and other gains within an ISA are free from income and capital gains tax, that doesn’t mean they’re also exempt from IHT.

To put it clearly, Inheritance Tax still applies to ISAs. Let’s dig into why.

When someone dies, the total value of their ISA (or ISAs) is included as part of their estate. That means that unless their estate is below the relevant IHT thresholds set out above, or left entirely to an exempt beneficiary, the value of the ISA can be subject to Inheritance Tax at the rate of 40%.

This applies to all types of adult ISAs: Cash ISAs, Stocks & Shares ISAs, Innovative Finance ISAs, and Lifetime ISAs.

The exception to this rule is Junior ISAs (JISAs), as they belong to the named child and not the parent or guardian who opened the account for them (known as the registered contact), they are, therefore, not classed within a deceased adult’s estate.

Valuing ISAs after death

When the account holder dies, any ISAs they have lose their tax-free status. This means no new contributions can be made.

The account becomes what’s known as a “continuing ISA”, which remains open (and the money in it will keep its tax-free wrapper) during the administration of the estate, and for up to three years after that, or until the estate is fully distributed – whichever comes first.

The value of an ISA for inheritance tax purposes is calculated based on its market value at the date of death. This includes:

  • The cash balance (in the case of Cash ISAs)
  • The value of any investments (applies with a Stocks & Shares ISA)
  • Any accrued interest or income not yet paid out

It’s the responsibility of the executor or administrator of the estate to obtain an accurate valuation – usually this is done through the ISA provider or investment manager.

What is Additional Permitted Subscription (APS)?

If the deceased has a surviving spouse or civil partner, they may be entitled to an Additional Permitted Subscription (APS).

This allows them to make a one-off additional ISA contribution, up to the value of the deceased’s ISA at the date of death – without this amount counting towards their own personal ISA allowance.

This rule means that while the ISA itself is still subject to IHT, a surviving spouse can continue to benefit from the tax-efficient wrapper.

To find out more about how ISAs can be inherited and how APS works in practice, see our Inheriting an ISA article.

To keep things simple, we’ve broken down the different ISA types and their IHT status in the table below.

ISA Type Subject to IHT? Notes
Cash ISA Yes Included in estate –valued at cash balance and accrued interest
Stocks and Shares ISA Yes Valued at market price of investments at date of death
Innovative Finance ISA Yes Includes peer-to-peer loans and similar investments
Lifetime ISA Yes May have withdrawal penalty unless used for house deposit or retirement
Junior ISA No Belongs to the child and so not part of the parent’s estate

Are Junior ISAs exempt from inheritance tax?

Junior ISAs (JISAs) are a popular way for parents and guardians to save and invest for their children’s future – but how are they treated when it comes to Inheritance Tax (IHT)?

In short, usually, IHT does not apply to JISAs. This is because Junior ISAs legally belong to the child, not the parent or guardian who opened the account on their behalf.

Although a parent or guardian acts as the registered contact and manages the account, the money held in a Junior ISA is legally owned by the child. They will then gain full access to the funds when they turn 18, at which point the Junior ISA becomes a standard adult ISA in their own name.

Because of this, if a parent or guardian passes away, the value of the Junior ISA does not form part of their estate and so is not considered when calculating IHT.

But what about IHT, gifting, and JISA contributions?

Here’s where things get a little more complicated.

While the Junior ISA itself is outside of the estate, the money paid into it by a parent is classed as a gift. That means that IHT rules on gifting may still apply, depending on how much was contributed, and when.

Here’s a breakdown of IHT gifting rules that may affect Junior ISA contributions:

Gifting Rule How it works
£3,000 annual exemption You can give away up to £3,000 each tax year without it being added to your estate for IHT.
Carry forward unused allowance Unused exemption from one tax year can be carried over to the next (for one year only).
£250 small gift exemption You can gift up to £250 per person per tax year (as long as they haven’t also received part of your £3,000 annual exemption).
7-year rule Gifts above these limits are potentially exempt, but only if you live for seven years after giving.
Gifts from surplus income Regular gifts made from income – not capital – may be exempt if they don’t affect your standard of living.

How ISA savings may impact your estate’s tax position

The tax advantages of an ISA are, for many, what make them an appealing option when looking to save and grow money over time. However, they do not offer the same tax protections when it comes to IHT.

When someone passes away, the value of their estate includes all their assets – property, savings, investments, personal belongings, and any ISAs they hold. This means that:

  • The full market value of an ISA at the date of death is included in the estate’s total value
  • This applies to all adult ISAs, including Cash ISAs, Stocks & Shares ISAs, Innovative Finance ISAs, and Lifetime ISAs
  • Any accrued interest or investment growth up to the date of death is also included in the valuation

Interaction between ISA holdings and Nil-Rate Bands

The size of your estate (and this includes the values of your ISAs) determines whether IHT is due and how much is payable. Here’s how ISAs might influence IHT allowances:

  • The standard NRB is £325,000. This is the portion of an estate that can be passed on to a loved one or named person tax-free
  • The RNRB can provide an extra £175,000 allowance if you leave your home to a direct descendant (such as a child or grandchild)
  • These thresholds can be combined, and any unused allowance can generally be transferred to a surviving spouse or civil partner – potentially allowing up to one million pounds of the estate to be passed on without tax

If your ISA savings significantly increase the total value of your estate, there’s a chance this could reduce the amount of your estate that falls within these tax-free thresholds.

In higher-value estates (over two million), the residence nil-rate band begins to taper, which reduces the benefit of that additional threshold. ISA balances can be part of what push an estate into this range.

And what about the effect of gifting?

Gifting during your lifetime, such as funding a Junior ISA, can reduce Inheritance Tax (IHT) liability, but the rules often vary and can get complex. Small gifts may be exempt, while larger ones are only tax-free if the giver lives for a further seven years after giving or meets the criteria for gifts from surplus income.

Given the intricacy of the rules around this, especially with gifts from income, it is always best to seek qualified financial advice if you’re feeling confused or unsure.

Protecting your ISA from inheritance tax

Of course, most people will simply make use of the tax rules and allowances that apply to their circumstances. That’s why this section looks at options for structuring your estate in a way that may help to protect your ISAs from IHT.

Here are some key things to consider when it comes to managing ISAs and IHT:

Including ISA holdings in your will

A legally valid and up-to-date will is the most basic and essential tool for managing the distribution of your assets after death, including your ISAs.

ISAs form part of your estate unless transferred to a spouse or civil partner under the Additional Permitted Subscription (APS) rules.

Your will outlines who should receive your ISA funds and other assets, helping ensure your wishes are followed. Without one, intestacy laws apply.

Without a will, your estate (including ISAs) will be distributed according to default legal rules, which may not align with your intentions.

Including your ISA holdings in your will doesn’t make them exempt from IHT, but it does provide clarity and helps with the estate administration process.

Common estate considerations involving ISAs

Let’s take a look at some of the most common ISA considerations in relation to managing your estate:

1. Using gifting and annual exemptions

While you cannot gift your ISA to someone during life (because ISAs are individual accounts), you can gift money that could be used by someone else to fund their own ISA or Junior ISA. These gifts, however, may be subject to IHT depending on the gifting rules we covered earlier on.

Contributions to Junior ISAs for children or grandchildren are considered gifts, and IHT rules may apply depending on the timing and value of the gift.

2. Structuring investments for IHT efficiency

Some people may have Alternative Investment Market (AIM)-listed shares within a Stocks & Shares ISA, as certain AIM companies may qualify for Business Property Relief (BPR). AIM is a sub-market of the London Stock Exchange (LSE) that allows smaller, growing companies to raise capital with more flexible regulatory requirements than the main market, which can make these shares appealing for both growth potential and tax-planning purposes.

If held for at least two years (and still held at the time of death), these investments could potentially be passed on free from IHT.

This doesn’t change the ISA’s IHT status by default; it ultimately depends on the underlying investments and whether they qualify for BPR. And something to bear in mind is that AIM investments carry greater risk, including the possibility of losing your entire investment.

It’s worth remembering, AIM ISAs and BPR are complex, so specialist advice is generally advisable in this area.

3. Using ISAs alongside pensions in estate planning

ISAs and pensions are taxed differently upon death:

  • ISAs are included in your estate and may be subject to IHT
  • Pension death benefits (in many cases) fall outside your estate for IHT purposes

In light of this, some people may approach balancing withdrawals from their ISA and pension to maximise efficiency – but given its complexity, this is an area where professional advice is considered paramount as decisions can be tailored to your particular circumstance.

4. Making the most of nil-rate bands and taper relief

As covered earlier, the nil-rate band (£325,000) and residence nil-rate band (£175,000) could together provide up to £500,000 of tax-free allowance per individual. For couples, this could amount to a combined potential allowance of £1 million, provided any unused allowances are transferred between spouses or civil partners.

If your estate exceeds two million, the residence nil-rate band is gradually reduced – and ISA balances may contribute to this total, reducing the relief available.

Taper relief may apply to larger gifts made between 3 -7 years before death, but does not reduce IHT on assets like ISAs that are still part of your estate at the time of death.

5. How ISA assets are handled in probate

After death, your ISA becomes a “continuing ISA”, which retains its tax-free status temporarily. Usually, this lasts until the probate process is complete or up to three years, whichever arrives sooner. However, it’s worth noting:

  • No new contributions can be made during this time.
  • The ISA’s value is frozen at the date of death for IHT purposes.
  • The executor must declare the ISA’s value when applying for probate.
  • Once probate is granted, the ISA funds can be distributed in line with the will
  • Probate can take several months or longer, depending on the estate’s complexity and whether there is a valid will in place.

6. Legal structures and estate distribution 

Some individuals use trusts or other legal structures as part of their estate planning. While ISAs themselves cannot be placed in a trust, other assets may be managed this way to help control distribution or reduce tax.

7. Where professional support may be useful

IHT planning (especially involving ISAs, gifting, trusts, and investment structuring) is layered and complex.

The approach that is right for you will – naturally – depend on your personal circumstances, including the size of your estate, your family situation, and your financial goals.

Many people choose to speak to legal or financial professionals when managing their estate or making plans for the future.

Wealthify does not provide financial or tax advice. If you’re unsure how inheritance tax affects you or your ISA savings and or investments, it’s important to seek guidance from a qualified adviser.

Final thoughts

While ISAs are certainly appealing for the tax advantages they offer during life, it’s still important to remember that – in most cases – their value will still be included within your estate when it comes to IHT.

As we’ve covered, Junior ISAs are the exception to this, while all other adult ISAs (Cash, Stocks & Shares, Innovative Finance, and Lifetime ISAs) all impact the taxable value of your estate.

Understanding how ISAs fit into estate planning is a vital step in protecting your wealth and making sure your assets are passed on according to your wishes.

If you’re looking to explore how different ISA types might help you reach your financial goals, you can check out Wealthify’s different ISA offerings below:

 

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.

Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.

 

References:

  1. A guide to Inheritance Tax | MoneyHelper
  2. How Inheritance Tax works: thresholds, rules and allowances: Overview | GOV.UK
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