ISAs on death                         

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Individual Savings Accounts (ISAs) on Death

As you may know, ISAs have a number of tax advantages. From 6 April 2018, these have been extended such that they apply during the administration of a deceased investor’s estate. This note is intended to be a summary of the extent to which ISAs are tax exempt in the administration of an estate.

Income tax and capital gains tax (CGT)

During your lifetime, any interest received on a cash ISA is free from income tax and any dividends from stocks and shares ISAs are exempt from the dividend tax. This is the case regardless of the amount of interest and/or dividends received. Additionally, any capital gains made on the sale of a stocks and shares ISA is also free from capital gains tax. 

Before 6 April 2018, it was the case that once the ISA holder died, the ISA would lose its tax favoured status. What this meant is that any income received during the course of the administration of the estate would be subject to income tax at the executors’ rate and any gain (from the date of death) on the disposal of a stocks and shares ISA would be subject to capital gains tax, where the gain exceeded the executors’ annual capital gains tax exemption.

Happily, from 6 April 2018 this is no longer the case. ISAs continue to enjoy their tax favoured status for income tax and capital gains tax even while an estate is being administered, subject to certain time limits. The tax treatment comes to an end at the earlier of:

• The completion of the administration of the estate;
• The third anniversary of the date of death; or
• The closure of the ISA due to all the funds being withdrawn. 

Inheritance tax (IHT)

ISAs are not free from IHT. If they are given on the death of an investor to a surviving spouse or civil partner, they will not be subject to IHT because of the usual spousal exemption rules. If, however, an ISA is given to any other (non-exempt) beneficiary, or forms part of the remaining estate left to non-exempt beneficiaries, IHT is potentially payable on the value of the ISA at the date of the investor’s death, depending on the value of the whole estate and whether it exceeds the deceased investor’s available nil rate band.

Transfer of ISA allowances to a surviving spouse

Since 6 April 2015 it has been possible for a deceased person’s ISA allowance to be transferred to their surviving spouse or civil partner. This means that the deceased’s spouse will be entitled to an additional ISA allowance equal to the value of the deceased’s ISAs at the date of his death.

For example, Jane is married to John. John dies leaving his entire estate to Jane including ISAs with a date of death value of £100,000. In addition to her own ISA allowance for 2020/21 of £20,000, Jane is able to use John’s allowance of £100,000. If Jane wishes to use cash to subscribe for additional ISAs in her name of £100,000 then she has to do so within 180 days (about six months) of the administration of John’s estate being completed or by the end of three years after John’s date of death (whichever is the later.)

Alternatively, Jane can choose to transfer John’s ISAs into her name without realising them as long as the ISAs have remained with John’s ISA manager until she makes a decision to transfer them. Jane must make the subscription within 180 days of the beneficial interest in the ISAs being transferred to her by the executors.

There is one complication that Jane will have to bear in mind: it is the value of the ISAs at the date of John’s death that counts towards her additional allowance. If say John’s ISAs are worth £105,000 by the time she subscribes then only £100,000 can be subscribed. Similarly, if the value has fallen to £95,000 Jane could add an additional £5,000 in cash to the subscription.

In Summary

ISAs are:

• Free of income tax and Capital Gains Tax (CGT) during lifetime;
• Free of income tax and CGT during the administration of the estate (subject to time limits);
• Will be subject to IHT unless left to a surviving spouse or civil partner; and
• A surviving spouse will acquire equivalent ISA allowances to the value of the deceased investor’s ISAs at the date of death.

Important Information

The information provided is based on our current understanding of the UK legislation and may be subject to amendments as a result of changes in legislation.

All references to taxation are based on our understanding of current UK taxation law and may be affected by future changes in legislation, the individual circumstances of the investor and pension scheme conditions.

The information provided in this article is not intended to offer advice.