Are ISAs Subject to Inheritance Tax? What You Need to Know

Before anything else, one honest note. If you have come to this page recently after losing someone, please do not feel you need to take any of this in today, or even this week. It will still be here when you are ready.

I am not a financial advisor and nothing in this post constitutes financial advice. All investments carry risk and the value of your investments can go down as well as up. Please do your own research and consider seeking independent financial advice before making any investment decisions.

If you have come here because someone you love has died and you are trying to understand what happens to the ISA they left behind, I am sorry, and I hope what follows helps. If you have come here because you are planning ahead and want to know what happens to your own money one day, that is a sensible thing to be doing, and there is no need to feel morbid about it.

Either way, I want to answer the question directly and gently. Are ISAs subject to inheritance tax? Yes. But the full picture is kinder than that single fact sounds on its own, and I want to walk you through exactly what it means, without jargon and without rushing you.

I’m Angelina, and I write about investing and money for women trying to make sense of their finances without feeling talked down to. Death and money sitting in the same sentence is hard enough without confusing language making it harder, so I have tried to write this as plainly and calmly as I can.

Are ISAs subject to inheritance tax? The short answer

Yes. ISAs are subject to inheritance tax. The tax free protection an ISA gives you while you are alive, from income tax and capital gains tax, does not carry over to inheritance tax. When you die, the value of your ISA is added to everything else you own and counted as part of your estate.

But here is the part that softens that, and it matters. If you leave your ISA to your husband, wife, or civil partner, no inheritance tax is due on it at all, because anything left between spouses and civil partners is completely exempt. So although ISAs are subject to inheritance tax in principle, for a great many people reading this, that one fact about spouses and civil partners is the answer you actually needed.

Why an ISA is not free from inheritance tax

This is the bit almost everyone gets wrong, and it is worth being completely honest about, because getting it right removes a lot of unnecessary worry later.

An ISA is what is called a tax wrapper. While you are alive, it shelters any interest, dividends, or investment growth inside it from income tax and capital gains tax completely, for as long as you hold the money there. That protection is real, and it is one of the best tools available to ordinary savers in the UK.

But that protection was only ever about income tax and capital gains tax. It was never about inheritance tax, and it was never designed to be. When you die, HMRC looks at everything you own, added together, your home, your savings, your investments, your ISA, minus anything you owe, and calls that total your estate.

It does not matter whether the money sits in an ISA, a current account, or under the mattress, and it does not matter how many ISAs you hold either. If you are not sure of the rules on that, I go through them properly in my post on how many ISAs you can have.

So the honest answer to whether ISAs are subject to inheritance tax is not really about the ISA at all. It is about your estate as a whole, and whether that estate sits above the threshold where inheritance tax starts to apply.

When do you pay inheritance tax on ISAs? The thresholds explained

This is usually where whether ISAs are subject to inheritance tax stops being an abstract worry and starts being about your own numbers, so let’s get straight into them, because for many people reading this, the numbers themselves are reassuring.

Every person has a nil rate band of £325,000, the amount you can leave behind, across everything you own, with no inheritance tax due at all. If your estate, ISA included, comes to less than that, there is nothing to pay.

If you own a home and are leaving it to your children or grandchildren, there is a second allowance on top, the residence nil rate band, worth an extra £175,000. Together, that can take your threshold up to £500,000, and up to £1,000,000 for a married couple or civil partners where a main home passes to their children or grandchildren, since any unused nil rate band and residence nil rate band from the first death can carry over to the second.

Both figures are frozen at these levels until April 2031, correct at the time of writing, though thresholds are set by the government and can change, so it is worth checking gov.uk if you are reading this some years from now.

It is worth being honest about who that £1,000,000 figure does not apply to, because it is easy to read it as a promise every married couple gets. Take a married couple with no children. Between them they can still transfer their nil rate bands, giving a combined threshold of £650,000, but there is no residence nil rate band on offer, because that allowance only exists when a home passes to children, grandchildren, or step-children. £650,000 is their real ceiling, not £1,000,000.

The same is true for a couple who have rented their whole lives together and have no home in the estate to leave at all, and for anyone whose home passes to someone outside that direct line, a sibling, a niece or nephew, a friend, or a charity, rather than to a child or grandchild. So if you are a childless widow, or a widow whose home is going to someone other than a child or grandchild, please work from £650,000 as your real number, not £1,000,000, when you are doing your own sums.

A quick example to help you locate yourself in this. Say your estate, once your ISA and everything else is added up, comes to £280,000. That is under the £325,000 threshold, so there is no inheritance tax to pay, on the ISA or on anything else. Say instead your estate comes to £420,000, and you own a home worth £250,000 that you are leaving to your children.

Your threshold in that case is £500,000, so again, nothing is due. Only the amount above your available threshold is ever taxed, at 40 percent, never the whole estate. This is really the heart of whether ISAs are subject to inheritance tax in your specific case, not a fixed yes or no, but a threshold question.

The spousal exemption

If there is one thing I want to land clearly in this whole post, it is this section.

Anything you leave to your husband, wife, or civil partner is entirely free of inheritance tax, no matter how large the amount, and regardless of whether it sits in an ISA, a house, or anywhere else. There is no threshold to worry about and no form to fill in to claim it. It simply happens.

This is why, for a married reader or a reader in a civil partnership, the honest answer to whether ISAs are subject to inheritance tax often comes with real relief attached. If your ISA passes to your spouse or civil partner, none of what I have just explained about thresholds even needs to apply to that money. It passes to them whole.

I do want to be gentle but clear about one thing, because it is an important distinction and I would rather you hear it plainly than stumble into it later. This exemption is specifically for spouses and civil partners. It does not extend to a partner you live with but are not married to, however long you have been together. I know that will land differently depending on your situation, and if it applies to you, I have tried to address it honestly further down this page.

Inheriting an ISA from your spouse: the extra allowance

There is a second piece of good news here, separate from the exemption above, and one of the more valuable things a surviving spouse or civil partner can claim, yet it remains genuinely little known.

It is called the Additional Permitted Subscription, or APS, and it has nothing to do with inheritance tax itself. It is a one off boost to your own ISA allowance. When your spouse or civil partner dies, you get an extra ISA allowance for that tax year equal to the value of their ISA, on top of your own normal allowance of £20,000.

Here is what that looks like in practice. Say your husband’s ISA was worth £50,000 when he died. You would get your usual £20,000 allowance for the year, plus an extra £50,000 APS allowance, letting you shelter that inherited money (£70,000 total) inside your own ISA that year and keep it growing tax free.

Since April 2018, when someone dies their ISA does not close straight away. It becomes what HMRC calls a continuing account of a deceased investor, and stays free of income tax and capital gains tax for up to three years while the estate is settled, or until it is closed, whichever happens sooner. Your APS allowance is based on whichever is higher, the value of the ISA on the day they died, or its value when the account eventually closes, so growth during that in between period is not lost to you.

One small practical note. To claim the APS, you need to have been living together with your spouse or civil partner at the time of death, rather than separated. If you are unsure where you stand, your ISA provider’s bereavement team can talk you through it gently.

What happens to an ISA when you die if you’re not married

I want to address this honestly, because it is a real and common situation, and skating past it would not be fair to you.

If your ISA passes to anyone other than a spouse or civil partner, a child, a sibling, a partner you live with but are not married to, it becomes part of your estate in the ordinary way. ISAs are subject to inheritance tax in exactly the same manner as everything else you own, if your estate as a whole is above your threshold. There is no inherited allowance in this situation either. The person who inherits the money gets the money, but not the tax free ISA wrapper that came with it, and there is no APS to soften that.

This is, I think, the hardest truth in this whole post, particularly for unmarried couples who have built a life and often a home together over many years. The law simply does not treat that relationship the same way it treats marriage or civil partnership for this purpose, whatever the reality of the relationship looks like day to day.

If this describes your situation, it may genuinely be worth speaking to a proper estate planning professional, because there are things that can be done, and you deserve to understand your options from someone qualified to lay them out for you.

What you can do about it

I am not going to pretend I can hand you a neat list of tactics here, because I’m not qualified to, and this is exactly the kind of decision where getting it wrong can be expensive and hard to undo.

What I can tell you honestly is that people in your position generally look at some combination of leaving assets to a spouse or civil partner where that applies, using annual gifting allowances gradually over time, and working with a qualified financial adviser or estate planner who can look at the whole situation properly. None of that is a substitute for proper advice tailored to you.

One more honest note, because it matters here. Pensions, including SIPPs, are not treated in quite the same way as ISAs for inheritance tax. Pensions have generally sat outside your estate for this purpose, though that is changing too, with most unused pension funds now due to come into the scope of inheritance tax from 6 April 2027 under current government plans.

If you are trying to work out where to hold money for the years ahead, I go through the difference properly in my guide to what a SIPP actually is, and in my SIPP vs ISA comparison, where I look at the inheritance side of that decision in more depth.

None of this happens separately from the rest of your finances either. If you are trying to see the fuller picture of what you might need and what you might leave behind, my post on how much you need to retire in the UK is a reasonable place to start. Wherever you land, the core fact does not change: ISAs are subject to inheritance tax, and planning around that honestly is almost always better than avoiding the thought of it.

FAQ

Are ISAs exempt from inheritance tax?

No. ISAs are subject to inheritance tax, even though they are exempt from income tax and capital gains tax while you are alive. When you die, the value of your ISA is added to your estate along with everything else you own, and inheritance tax may be due if the total is above your available threshold. The one exception is leaving it to a spouse or civil partner, which is entirely free of inheritance tax regardless of the amount.

Do you pay inheritance tax on ISAs?

Not as a separate charge. There is no special ISA tax. Instead, ISAs are subject to inheritance tax in the same way as the rest of your estate, because their value is simply added to everything else you own when you die. If your estate as a whole is above the £325,000 nil rate band, plus £175,000 more if a home passes to children, inheritance tax of 40 percent is due on the amount above that threshold, not the ISA specifically.

What happens to an ISA when you die?

Your ISA does not close immediately. It becomes what HMRC calls a continuing account, meaning it stays free of income tax and capital gains tax for up to three years while your estate is settled, though no new money can be paid in. Its value is included in your estate for inheritance tax. If you are married or in a civil partnership, your spouse also inherits an extra ISA allowance equal to its value.

Can you inherit an ISA tax free?

Yes, if you are the spouse or civil partner of the person who died. You can inherit the money itself completely free of inheritance tax, and you also receive an extra one off ISA allowance called the Additional Permitted Subscription, letting you shelter that same amount inside your own ISA. If you are not a spouse or civil partner, such as a child or sibling, there is no inherited allowance, and the money may be subject to inheritance tax.

Do ISAs form part of your estate?

Yes, always. Regardless of how many ISAs you hold or which type they are, cash, stocks and shares, or innovative finance, their combined value is added to everything else you own, property, savings, other investments, minus any debts, to work out your estate’s total value. Because ISAs are subject to inheritance tax in the same way as any other asset, that total is then measured against the nil rate band to see whether anything is due.

What is the inherited ISA allowance?

The inherited ISA allowance is called the Additional Permitted Subscription, or APS. It is a one off boost to a surviving spouse or civil partner’s own ISA allowance, equal to the value of the ISA their partner held when they died, or when the account closes, whichever is higher. It has nothing to do with inheritance tax, and it lets you keep that inherited money growing tax free inside your own ISA. 

I am not a financial advisor and nothing in this post constitutes financial advice. All investments carry risk and the value of your investments can go down as well as up. Please do your own research and consider seeking independent financial advice before making any investment decisions.