ISA inheritance explained: Tax advantages laid bare by experts | Personal Finance | Finance

Individual savings accounts (ISAs) offer savers the opportunity to invest without paying income tax on interest earned or capital gains tax. These benefits make it a particularly favorable route to take to save and in many cases the benefits can also extend beyond death. But what exactly are the rules for inheriting an ISA?

Can people inherit ISAs?

According to Todd Wootton, private client specialist at accountancy firm, Menzies LLP, anyone can inherit the proceeds of an ISA “but will inherit its value, not the casing itself”.

However, a spouse or civil partner can inherit the ISA and continue its tax-free status through an Additional Allowed Subscription (APS), also known as an inherited ISA allowance.

Before 2015, ISAs could be passed on to beneficiaries named in the person’s will, but automatically lost the tax-efficient ‘wrapper’.

Daniel Boyle, private client solicitor at Freeths, said this now means that “any ISA funds transferred as a TPT retain their tax-free status and count as a one-off ISA allowance granted to the surviving spouse or civil partner for it tax year only.

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“For example, if your partner had £50,000 in ISA savings, your ISA allowance for the year would be £70,000 (the value of your partner’s savings and your own ISA allowance for the 2022/2023 tax year, which currently stands at £20,000. ).”

However, there are still benefits that can be claimed even if the ISA is not left to the surviving partner.

Mr Boyle continued: “If the deceased leaves the money in the ISA to someone else, the surviving partner is still entitled to an increased allowance for that tax year equal to the value of the ISA assets.

“The rules mean that the tax efficiency of the deceased’s ISA will not be lost and that the surviving partner will be able to enjoy the tax benefits they previously shared with their partner.

“This means the vehicle can be a useful source of tax-free income in later life for the surviving partner.”

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But, it is important to note, the spouse or civil partner must have been living with the deceased at the time of their death.

What if the ISA value increases after death?

Before 6 April 2018, the value of the TPT was the value of the ISA at the date of death – but this has since changed.

Andy Pennie, managing director at Intelligent Pensions, said: “Since 6 April 2018, the concept of a ‘continuing ISA’ has been born, allowing the ISA to retain its status until the earliest of three things.”

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The laws of intestacy refer to when a person dies without leaving a valid will, which means that their estate (money, property, assets) will be divided according to certain rules.

Mr Moore continued: “Claiming a TPT and exploring the options available to you can be a complex process, so wherever possible you should seek professional financial advice to ensure you make the right decisions. “

However, it is important to remember that ISAs transferred to anyone other than a spouse or civil partner after death are subject to inheritance tax (IHT).

Max Sullivan, wealth planner at Kingswood told “ISAs are only ISAs during one’s lifetime, on death they are liable to HMRC’s coffers. That is why legacy and intergenerational planning are fundamental.”

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