Can I inherit an Isa?
If your spouse or partner dies, you'll probably be able to inherit their Isa savings through an 'inherited Isa allowance', also known as an 'additional permitted subscription' (APS).
This means the surviving spouse has a one-off additional Isa allowance that's equivalent to the value of the deceased partner's Isa when they died.
So, if someone's spouse passes away, leaving an Isa worth £40,000, the surviving partner will not only have the £20,000 Isa allowance that's open to everyone in the 2020-21 tax year, they'll also have an additional allowance - or additional permitted subscription - of £40,000 for inheriting their spouse's Isa.
These rules have only been in place since April 2015. Previously, Isa savings could be passed on to beneficiaries named in your will or through the laws of intestacy if you die without a will, but automatically lost the tax efficient 'wrapper' they enjoyed during your life.
That meant that if your spouse wanted to reinvest the savings you built up, they could only do so up to their maximum Isa allowance for that year.
How are Isa allowances inherited?
The additional Isa allowance can be used regardless of what the deceased states in their will.
This means that even if the money is left for someone else to inherit, such as a relative that isn't the person's spouse, the partner is still entitled to an increased allowance equivalent to the value of the Isa assets.
So, if you left £50,000 worth of Isa assets to your child, your partner would still be entitled to an increased Isa allowance of £50,000, although they would be using their own money to fund it if they wanted to pay that much into an Isa.
What if the Isa grows in value after death?
Since 6 April 2018, all types of Isa (except a Junior Isa) turned into a ‘continuing account of a deceased investor’ or a ‘continuing Isa’, so that any growth remains tax-free.
So, if a deceased person's Isa savings aren't transferred to their spouse for, say, three months, and they receive £300 in interest, rather than the spouse losing out on the interest that's been accrued, now that makes up part of the additional subscription.
Before this tweak to the rules, the APS allowance was frozen at the value of the deceased's Isa at the time of death. This meant that any growth became taxable during the probate process, which can take months or even years depending on the complexity of the estate.
This rule change means that the APS allowance is now equal to the value of the money passed on, or the value at death, whichever is higher.
Is there a time limit for additional Isa subscriptions?
To give people time to sort out the affairs of a deceased person, the increased Isa allowance can be claimed by filling out an application form and is available for three years after the date of death, or if longer, 180 days after the estate has been administered.
These rules came into force on 6 April 2018, and mean that no money can be paid into the deceased's Isa during administration, but it will continue to benefit from its tax-free status, and any growth will remain tax-free, too.
This status - known as a 'continuing Isa' - lasts until either the administration of the estate is complete, the Isa is closed, or three years pass since the person's death (whichever is soonest).
Find out more: How to make a will – read our step-by-step guide.
Where can I invest the Isa savings I've inherited?
The surviving partner can choose where to transfer the inherited savings. They can:
- keep the money with the original Isa provider
- put the money with their own Isa provider
- open up a new cash Isas or a new stocks and shares Isa and place the additional subscription there.
An APS allowance can only be transferred once, but if there is more than one Isa to inherit, you'll have an allowance with each provider.
Under the Isa rules, you can only have one cash Isa, and one stocks and shares Isa per tax year. However, you won't breach these rules if you open up an Isa for the sole purpose of transferring inherited savings.
So, you could have some money in your own cash Isa with one bank, and place the Isa savings you've inherited with another bank.
Once the transfer has been made, the normal Isa rules apply and the money is treated as if it was previous years' subscriptions.
Do Isa providers have to accept APS payments?
In short, no they don't. Isa providers aren't obliged to accept APS allowances, so you may not be able to deposit inherited savings with the provider of your choosing.
Which? analysed Moneyfacts data and found that 45% or 157 of the 349 fixed and variable rate cash Isas on the market will accept APS cash Isa and/or stocks and shares Isa transfers.
A few providers have launched products specially designed to take advantage of the new rules, shown in the table below.
However, some of these accounts will only accept APS payments if the deceased Isa holder was a customer with them. Others ask beneficiaries to open an inheritance Isa solely for this purpose.
The table below shows the providers with products specifically designed for APS payments. The details are correct as of February 2020.
|Account||AER (£10,000 balance)||Managing the account||Opening restrictions|
|Brittania Additional Allowance Isa||0.56%|| ||Deceased must have been a Britannia, Smile or The Co-operative bank Isa customer|
|Coventry Building Society Additional Allowance Isa||1.2%|| ||Deceased must have been a Coventry Building Society Isa customer|
|Dudley Building Society APS instant access Isa||0.8%|| ||None|
|Furness Building Society APS cash Isa||0.5%|| ||None|
|Kent Reliance APS cash Isa||1.4%|| ||Deceased must have been a Kent Reliance customer|
|NS&I Direct Isa inherited allowance account||0.9%|| ||None|
|Nationwide Inheritance Isa||0.4%|| ||Deceased must have been a Nationwide Isa customer|
|Penrith Building Society APS cash Isa||1.25%|| ||Deceased must have been a Penrith Building Society Isa customer|
|Santander Inheritance Isa||0.6%|| ||None|
|Skipton Building Society Legacy Isa||1%|| ||None|
|Virgin Money easy access cash Isa||0.5%|| ||Deceased must have been a Virgin Money Isa customer|
|West Brom Building Society APS Isa||0.7%|| ||None|
|Loughborough Building Society Spousal Inheritance cash Isa||0.85%|| ||None|
What happens when you inherit a stocks and shares Isa?
Stocks and shares Isas are treated in the same way as cash Isas under the reforms, with surviving spouses entitled to make additional subscriptions into either a stocks and shares Isa or a cash Isa.
There are two ways for a surviving partner to use their inherited stocks and shares allowance:
- Sell investments for cash: all investments – such as funds and shares – could be sold, and the resulting cash can be used to open a new Isa. This is known as a 'cash transfer'.
- Transfer investments as they are: investments can be transferred directly without being sold. This is known as an ‘in specie’ transfer.
Additional subscriptions made via an ‘in specie’ transfer must be made within 180 days of the surviving partner inheriting the funds and can only be made to the deceased Isa provider.
Find out more: What is a stocks and shares Isa?
Inheriting an Isa: FAQ
We've answered some of the most common questions about inheriting an Isa below.
Can a child inherit an Isa?
If a parent dies and leaves savings in an Isa, a child or children can inherit the money - but not in the tax-free way a spouse can inherit an Isa.
Instead, the money will form part of the deceased person's estate, and it may be liable for inheritance tax.
Are Isas exempt from inheritance tax?
No - Isas form part of a person's taxable estate - along with other savings, property and other possessions - and are therefore subject to inheritance tax.
However, if the estate doesn't exceed the £325,000 nil-rate band (or more if the estate contains a property that was the deceased's main residence), then there'll be no inheritance tax to pay.
The only exception is when Isas are passed on to the spouse of the deceased, which we explain in this guide.
Find out more: Inheritance tax: thresholds, rates and who pays
Can a Junior Isa be inherited?
Money held in a Junior Isa is usually held until the child turns 18, at which point they can control what they want to do with the funds. However, if a child dies before they turn 18, any money in a Junior Isa will be paid to whoever inherits their estate.
This is usually the child's parents and would not be subject to the tax-free Isa inheritance rules.
However, if the child was over 16 and married the money would go to their spouse - in which case, the Isa inheritance rules would stand.
Can a lifetime Isa be inherited?
Yes, the inheritance rules around lifetime Isas are the same as for any other type of Isa.
The government bonuses will have already been paid into the deceased person's account on a monthly basis while they were alive, so they'll be passed on to whoever inherits the Isa funds.
As with other Isas, only spouses or civil partners can benefit from the tax-free Isa allowance transfer - for anyone else, the Isa funds will add to the estate of the person who's died, and there may be inheritance tax to pay.