What Happens If You Inherit ISA Pots: Everything You Need To Know

The rules for inheriting individual savings accounts as a beneficiary after the holder passes away can differ depending on your relationship with them.

If you’re a surviving spouse or civil partner, your tax implications will be different when receiving an ISA compared to if you’re the child or unmarried partner of the deceased. 

Generally speaking, ISAs are subject to Inheritance Tax (IHT) as part of the deceased’s estate. However, IHT on ISA tax implications can vary based on the different exemptions and allowances that can apply. 

So, what happens if you inherit ISA pots? Let’s take a deeper look at the various taxation scenarios to provide you with a full picture of what you need to know: 

Inheriting an ISA as a Spouse or Civil Partner

In the event of the death of an ISA holder, their account will go to the named beneficiary in their will. In many cases, this will be their surviving spouse or civil partner. 

If the deceased died on or after the 6th April 2018, their ISA will officially end when either the will executor closes it, the administration of the estate is complete, or if three years pass after your spouse or civil partner dies. 

When this happens, their ISA will become a ‘continuing account of a deceased investor, meaning that the account’s investment will form part of their estate but stays tax-free until it’s closed. No new payments can be made into the Individual Savings Account.

In addition to your normal ISA allowance (£20,000 per tax year), you will be able to add a the amount of the deceased’s ISA when they died, or the value of the ISA when it’s closed, to your account as a one-off. 

For more information, it’s worth contacting the provider of your spouse or civil partner’s ISA for clarity on the processes involved in inheriting their pot. 

Inheriting as a Different Beneficiary

If you’re inheriting an ISA as any other beneficiary that isn’t a spouse or civil partner, then the tax-free wrapper for the account is lost, and the funds are distributed as part of the deceased’s estate. 

This means that if you’re a child, or an unmarried partner, or any other named beneficiary of the deceased, the value of the ISA that you receive will depend on whether their total estate exceeds the Inheritance Tax (IHT) threshold of £325,000 (with potential increases if a home is left to direct descendants). 

If the ISA is part of an estate that exceeds the deceased’s IHT threshold, you’ll be liable to pay a tax rate of 40% on the money that you receive above that threshold. 

This £325,000 threshold is set to remain in place until at least 2030, and you wouldn’t pay IHT on the value of the ISA you inherit if the deceased’s estate is below this amount. 

Another complication for beneficiaries who aren’t spouses or civil partners of the deceased is that they will have to use their own ISA allowance to reinvest any inherited funds, meaning that you’re unlikely to be able to invest the full amount of money you receive immediately. 

What About Junior ISAs? 

Because Junior ISAs (JISAs) are legally owned by the child, they won’t form any part of the parent’s estate if they die. This means that there will be no IHT considerations for the account and the child can access their funds when they turn 18. 

However, contributions to Junior ISAs may be considered a gift and thus subject to IHT rules such as the seven-year rule. 

If a grandparent contributes beyond their regular income to the child’s JISA and/or exceeds their own £3,000 annual exemption limit, the amount could be liable for IHT should they die within seven years of gifting the funds. 

Tax implications based on the seven-year rule operate on a sliding scale, with the amount of IHT to be paid changing based on how long before death the gift was received. To gain more insight into how much you may owe in IHT, it’s worth consulting a financial adviser or checking government guidelines on Inheritance Tax rules. 

ISA Inheritance Considerations 

It’s important to include your ISA in any will you create, regardless of the amount of funds in your pots.

You should also bear in mind the IHT implications of passing your investments or savings on to beneficiaries who aren’t your spouse or civil partner. 

Regularly check to ensure that the value of your estate doesn’t exceed the £325,000 limit that qualifies for the 40% rate of IHT. If you’re concerned that your beneficiaries may be liable to pay tax on your ISA, look to shift your will to ensure that your Individual Savings Account goes to your spouse or civil partner as a priority, while making different arrangements for other beneficiaries. 

Inheriting ISAs

Nobody wants to think about Inheritance Tax at a time when a loved one’s estate needs to be managed. However, taking the time to better understand the taxation associated with taking on an ISA, and the circumstances when tax is due, can save an administrative headache later on. 

If you’re unsure of your tax obligations when receiving an ISA as a beneficiary, free government services like Money Helper can help to point you in the right direction, while consulting your adviser can always help to ensure that you know where you stand with your money.