The rules on inheriting ISAs

At a glance

• You can inherit your spouse or civil partner's ISA savings and maintain their tax-efficient status
• To do this you’ll temporarily be granted a higher annual ISA allowance, known as the Additional Permitted Subscription (APS)
• Anyone named as a beneficiary can inherit ISA savings, but the tax rules can be different for non-couples.

ISAs are tax-free accounts which can only be held in a single name under a single ISA allowance, which can make inheriting the money held in those accounts a little tricky. The tax-free wrapper is essentially lost once any money is transferred, unless you’re a spouse or civil partner of the deceased, where different rules come into play.

It can get a little complicated, so let’s break down the ISA inheritance rules.

What happens to an ISA on death?

After death an ISA can no longer be contributed to, but it doesn’t automatically close. Instead, it will become what’s known as a “continuing ISA” that remains tax-free and can still grow in value. The value of the ISA will form part of the estate and beneficiaries can apply for what’s known as an Annual Permitted Subscription (APS) and/or ISA transfer in order to inherit the funds.

The ISA will then close once the administration of the deceased’s estate is complete or when the executor of the will closes it. Otherwise, the ISA provider will close it three years and one day after the death.

What are the rules on inheriting ISAs?

This will depend on whether you’re a spouse or civil partner of the deceased, or another named beneficiary.

If you’re a spouse or civil partner, in most cases you’ll be able to inherit your loved one’s ISA savings through an Additional Permitted Subscription (APS), also known as an inherited ISA allowance. This allows you to retain the tax-free status of the deceased’s ISA savings, allowing you to transfer the funds into your own ISA without exceeding your tax-free allowance (we’ll discuss how this works below).

If you’re not a spouse or civil partner but are a named beneficiary, you can still inherit the deceased’s ISA savings, but the amount will no longer be tax-free. The ISA instead forms part of the estate and there may be inheritance tax (IHT) to pay on it in the usual way, if the value of the estate exceeds the nil-rate band of £325,000. Find out more in our guide to inheritance tax.

Note that all types of ISA can be inherited (apart from a Junior ISA), including cash ISAs, stocks & shares ISAs and Lifetime ISAs, but the value will normally be in cash. Any investments held within the ISA will usually be sold before the money is transferred, unless the surviving spouse is with the same stocks & shares ISA provider, in which case the investments themselves can be transferred.

How Additional Permitted Subscription (APS) works

The APS, or inherited ISA allowance, is a one-off ISA allowance that’s granted to the surviving spouse or civil partner for that tax-year only. The APS is set at the value of the deceased’s ISA savings, which allows the beneficiary to transfer those funds into their own ISA without breaching their tax-free allowance.

It applies for all ISAs the deceased had; make sure to contact the provider(s) to find out the balance of each account and therefore what the total APS is.

Who can inherit an ISA?

Anyone can inherit an ISA, but in order to retain the full tax advantages through the APS, you must be:

• married or in a civil partnership with the deceased, and
• living with the deceased at the time of death.

Provided these two factors apply, you’ll receive the APS and can transfer the deceased’s ISA funds into your own account tax-free. If you’re separated, whether by court order, deed of separation or where the marriage or partnership has completely broken down, the APS does not apply.

However, other people can inherit the value of an ISA too, provided they’re named as the beneficiary. The difference is that the APS won’t apply, which means the funds will lose their tax-free wrapper – and if you invest the money in your own ISA, it will count towards your usual ISA allowance – and inheritance tax may come into play. This is particularly worth bearing in mind for children who inherit an ISA from a parent.

Inheriting an ISA from a parent

Children can inherit the value of an ISA from a parent, but they won’t be entitled to the APS. This means the money may become taxable if it exceeds their own ISA allowance, and there may also be inheritance tax to pay if the value of the estate exceeds £325,000.

The money will also be paid out in cash even if the parent held a stocks & shares ISA; any investments will be sold and the proceeds will form part of the estate.

Where can I invest an inherited ISA allowance?

An inherited ISA allowance can be made into:

• Cash ISAs
• Stocks and shares ISAs
• Innovative Finance ISAs (which allow the holder to make investments via peer-to-peer lending in a tax-free wrapper)

You can also use the APS to invest in a Lifetime ISA (LISA), but the rules are slightly different. You’re still only able to deposit up to £4,000 a year into the LISA, but if you use the APS, the £4,000 value will be restored to your inherited allowance for you to use elsewhere.

How do I claim an inherited ISA?

In order to claim an inherited ISA and benefit from the APS, you’ll need to contact the ISA provider and inform them that the account-holder is deceased, and that you want to make an APS claim.

You’ll need to complete an application form and provide:

• The deceased’s full name
• Their permanent residential address at the date of death
• The deceased’s date of birth and date of death
• Their National Insurance number (if known)
• The date that your marriage or civil partnership took place
• If relevant, the identity of the account provider who managed the deceased’s ISA.

You’ll also be required to declare that you are the surviving spouse or civil partner of the deceased, and that you were living with them at the time of their death. Note that if your partner had more than one ISA, you’ll need to apply for an APS from each individual provider. Your full APS amount will then be the value of each ISA pot combined.

When can I claim an inherited ISA?

You must apply for an APS within certain time limits. These are:

• Within 180 days of beneficial ownership passing to the surviving spouse or civil partner for ‘in specie’ transfers (where investments are moved without selling them first)
• Within three years of the date of death for cash subscriptions
• If later than three years, within 180 days of the completion of the administration of the estate.