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23.08.2023
Are ISAs subject to inheritance tax?
Individual Savings Accounts (ISAs) are popular with investors and savers looking to protect returns from tax. There is no tax to pay on any profits on investments housed in a Stocks & Shares ISA and no tax on any income or interest, so many people assume their ISA would be exempt from inheritance tax (IHT) too. However it’s important to remember that ISAs count as part of your estate and the favorable tax treatment does not extend to IHT.
If your combined assets including your ISAs are over the relevant threshold then your estate would have to pay the tax but there are a couple of exceptions.
1. Inherited ISA allowance from your partner
- The main exception is that assets left to a spouse or civil partner are free from IHT. Where a husband leaves their ISA, or other assets, to their wife, or vice versa, there is no tax to pay. However, IHT may subsequently become an issue on the death of the second spouse who inherits any of their partner’s remaining IHT ‘nil rate band’, the portion of an estate that is free from IHT.
- What’s more, no matter how the assets are divided according to the specifications of the will (or if there isn’t one, according to the rules of intestacy) in most cases a surviving spouse or civil partner can inherit the tax benefits of all the deceased’s accumulated ISAs through 'additional permitted subscriptions'.
- If there is no surviving spouse or partner, and the assets are left to another beneficiary such as a child, there is no APS available and the benefits of the deceased’s accumulated ISA ‘wrappers’ cannot be passed on. This means the beneficiary will not benefit from tax-free income and growth from the assets and they may have to declare this in their tax return.
2. Consider AIM ISAs as they are free from IHT
- Another exception to the rule is investing in shares listed on the UK’s Alternative Investment Market or AIM.
- Certain AIM shares, whether held inside or outside an ISA, qualify for Business Property Relief (BPR) which means they can be passed onto your heirs IHT free. That’s provided you hold the shares for at least two years, they are still held on death and the company still qualifies for the relief at that point. If the two-year period is not met, a surviving spouse or civil partner can inherit the portfolio without restarting the holding period.
- Share prices on AIM also typically experience greater ups and downs than those on the Official List of the London Stock Exchange, and they often have a wide ‘spread’ or difference between buying and selling prices. At times, it may be difficult or impossible to sell certain shares.
I am an Independent Financial and Mortgage Adviser and have worked in Financial Services for over 12 years. During my career I gained experience in assisting both individual and corporate clients.…
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