Are ISAs subject to Inheritance Tax?

ISAs are one of the most tax-efficient ways for UK residents to save or invest, allowing up to £20,000 per year in a tax-free wrapper.

However, while ISAs shelter income and capital gains from tax during your lifetime, the tax treatment can change on death. And that means inheritance tax (IHT) is a key concern for those with substantial investments held in ISAs.

So, what happens to your ISA when you pass away, and how can you protect it from IHT for your loved ones?

What is Inheritance Tax (IHT)?

When someone dies, the assets in their estate (savings, properties, investments, and so on) pass onto their chosen loved ones.

But before the assets are passed on, the estate is valued. If the value of the estate exceeds a certain threshold, then inheritance tax (IHT) is due.

The current threshold, known as the nil rate band, is £325,000. Any amount above this threshold is taxed at 40%, although certain exemptions, such as assets passed to a spouse or civil partner, may reduce the tax due.

N.B. Assets only pass on to your chosen beneficiaries if you create a will. If there is no will, the rules of intestacy apply. We highly recommend creating a will and making sure it still reflects your wishes once every five years.

Are ISAs subject to Inheritance Tax?

Yes, ISAs are subject to inheritance tax. Despite the tax-free status during your lifetime, ISAs are not exempt from inheritance tax.

That means, when you die, the value of your ISA is counted as part of your estate. If the total estate value, including your ISA, exceeds £325,000, the portion above this threshold is liable for IHT.

Does Inheritance Tax apply to all types of ISAs?

There are several different types of ISA, so no doubt your next question is whether inheritance tax applies to your ISA. Well, the short answer is yes.

It doesn’t matter if you have a cash ISA, stocks and shares ISA, lifetime ISA (LISA), or an Innovative Finance ISA – they’re all counted as part of your estate. The only exception are Junior ISAs, which behave a little differently. We’ll cover them in the next section.

Are Junior ISAs subject to Inheritance Tax?

If you open a Junior ISA for your child, the account and any money it contains belongs to your child. They can access the funds from 18 years old, when the account turn into a regular adult ISA.

In the meantime, you are the “registered contact”. You are responsible for managing the account, but it doesn’t belong to you. That means if you were to pass away, the Junior ISA does not form part of your estate.

However, this is where it gets a little tricky. If you have made payments into a Junior ISA, those payments may be subject to inheritance tax. How does that work?

Your contributions are, technically, gifts. So the rules surrounding gifting apply:

• You can gift upto £3,000 a year, to one or multiple people, without any worry of IHT. If you don’t use this allowance, or only use some of it, it can be carried over to the next year.
• You can also gift £250 to different people (not the same ones as in the £3,000 allowance though) with no IHT.
• You can gift any amount you like, and it won’t be subject to IHT, as long as you do not pass away within seven years of the gift.
• You can make regular gifts from excess income without attracting IHT. Be careful, though, there are complicated rules around giving gifts out of income. We recommend speaking to one of our advisers first.

How to protect your ISA from Inheritance Tax

If you want to protect your ISA from inheritance tax, there are several options you can consider:

• Spouse or Civil Partner Inheritance: ISAs passed to a spouse or civil partner are free from IHT. They can also benefit from the Additional Permitted Subscription (APS), which allows the surviving partner to inherit the ISA’s value and retain its tax-free status.
• AIM ISAs: Some ISAs hold shares listed on the Alternative Investment Market (AIM), which may qualify for Business Property Relief (BPR). After two years of ownership, the value of these investments could become exempt from IHT, although AIM shares carry higher risks. Most ISA providers do not offer AIM portfolios by default — you’ll need a specialist platform or adviser.
• Charitable Donations: Donating at least 10% of your estate to charity reduces the IHT rate from 40% to 36%, offering a way to reduce the tax burden while supporting charitable causes.

The takeaway here is that planning ahead, particularly if you are married or in a civil partnership, is the best option for protecting the value of your ISA.

Of course, the other option is, quite simply, to draw down your ISA account and spend the money. This would reduce the size of your estate and, therefore, any inheritance tax liability.

That would give you the option to start strategically gifting the money (see the rules on gifting above).

If you need further advice on protecting, gifting, or using ISA funds, our specialist inheritance tax team can help.

Frequently Asked Questions

I’ve inherited an ISA from my spouse. What should I do?

If you inherit an ISA from your spouse or civil partner, you can use the Additional Permitted Subscription (APS), which allows you to retain the ISA’s tax-free status. The APS permits you to add the value of the inherited ISA to your own ISA allowance, preserving its tax advantages. It’s recommended to contact your ISA provider for guidance on transferring the funds and ensuring the APS is applied.

Is the Additional Permitted Subscription (APS) automatic?

No, it’s not automatic. To use the APS, as the surviving spouse or civil partner, you must apply through your partner’s ISA provider. There’s often a specified time frame (usually 3 years from the date of death).

I’ve inherited an ISA from a parent. What should I do?

ISAs inherited from a parent do not retain their tax-free status and will be included in the parent’s estate for IHT purposes. Once inherited, the ISA funds will become part of your general savings or investments. You might consider consulting with a financial adviser to discuss effective ways of managing or reinvesting the inherited funds to optimise tax efficiency.

Can I put an ISA into a trust to avoid IHT?

Not directly. You cannot place an ISA itself into a trust, but you can withdraw funds from an ISA and place the money into a trust. This removes the funds from your estate (subject to conditions and potential IHT on the trust itself).

However, you need to be very careful with setting up and registering trusts. We recommend speaking to one of our team members for further advice.