Leaving Your ISA to Your Family

Individual Savings Accounts (ISAs) have many advantages over normal savings accounts – chiefly that the investment income earned on them is tax free and gains within them are not subject to Capital Gains Tax. They are, not surprisingly, widely regarded as a staple tool in the financial planning toolbox. A UK resident can invest up to £20,000 each tax year in an ISA.

However, there are disadvantages, one of which is that ISAs are always held by one individual and cannot be held jointly. This means that on death, an individual’s ISAs are part of their estate for Inheritance Tax (IHT) purposes. That contrasts with a person’s pension fund (which also benefits from a tax-free environment until income is taken from the pension), which can usually be passed on to relatives outside the IHT net.

Until recently, on the death of a spouse, their ISAs had to be ‘cashed in’. However, since 2015 ISAs have been able to be transferred to a spouse or civil partner directly using the ‘Additional Permitted Subscription’ (APS) rules, which give an additional allowance equal to the value of the ISA to the surviving spouse or civil partner. The APS must be used within three years of the death and there are some rules that apply to how the transfers are carried out. The practical effect of the APS rules is that the tax-efficiency of the original ISA is maintained.