ISAs are one of the most popular tax-efficient ways to save and invest, but how many of us know what happens to them when we die?
Here we outline what happens to your ISA when you pass away and some considerations you might want to think about.
What happens to your ISA when you die?
When you pass away, your ISAs will remain open until either they are closed by your executor or your estate is settled. During this time, your ISAs will continue to grow and any returns or gains won’t be subject to income or capital gains tax, although they might be subject to Inheritance Tax (IHT) if your estate is valued at more than the current £325,000 IHT threshold. You can find out more about how IHT works in our guide Understanding Inheritance Tax.
When your estate is settled the money and/or investments you have in your ISA accounts will be passed on to your beneficiaries, in line with any wishes given in your will. If you haven’t written a will, then the laws of intestacy will apply. You can find out more about these in our article Sorting out an estate when someone dies without a will.
If nothing happens with the ISA, for example, no final instructions are given, the ISA provider will close the ISA the day after the third anniversary of the date of death. At this point, the ISA wrapper is removed from the account and all subsequent income or gains will then become taxable in the hands of the estate.
If you’re leaving an ISA to a partner
If you’re leaving your ISA savings and investments to your husband, wife or civil partner, they’ll not only receive the money within the account, but they might also benefit from an extra ISA allowance, known as an ‘additional permitted subscription’ or APS.
This essentially means that on top of their own annual ISA allowance of £20,000 a year, they can also inherit an additional allowance equivalent to the value of your ISA or ISAs.
They’ll receive one allowance for each ISA you had. For example, say they have used your £20,000 annual ISA allowance this tax year. If you have £26,000 in a stocks and shares ISA, for example, then when you die, your spouse would be entitled to an additional one-off £26,000 ISA allowance on top of their £20,000 annual allowance.
You can read about the steps they’ll need to take to apply for an APS or close your ISA accounts below.
It’s worth knowing that your partner doesn’t have to have left the ISA value to you for you to claim their allowance. If you were living together, you should still be able to claim the APS, as anyone whose spouse or civil partner died on or after 3 December 2014, should be eligible.
If you’re leaving an ISA to any other beneficiaries
If you’re planning to leave your ISA to anyone other than your spouse or civil partner, make sure you’ve included this in your will. Bear in mind though that they won’t be eligible to inherit any additional ISA allowance from you when you die – this is only available to spouses or civil partners.
What to do if you’re managing the ISAs of someone who has died
If you are managing the estate of someone who has died and they had ISAs, there are a number of steps you’ll need to take to either close or transfer their ISA account. Each ISA provider will have a slightly different process, so it’s often easiest to contact them directly to ask them what their process is and what you need to do.
Generally, however, to close or transfer an ISA of someone who has died, you’ll need to:
- Contact the ISA provider(s) that the person who has died had an ISA with to tell them he or she has died.
- Include the person’s name, address, National Insurance number (if possible), date of birth, and the date they died.
- The ISA provider will often want an original or certified copy of their death certificate before they do anything so you’ll usually need to send this to them.
- If the person who has died was your wife, husband or civil partner, then you might want to include a statement saying this, detailing the date you married or entered a civil partnership to their ISA provider with evidence that you were living together when they died.
- The account will usually then be frozen and you’ll receive a valuation. If inheritance tax is payable, this will paid be based on the date of death value of the ISA
Once you’ve been granted probate, you’ll need to give the ISA provider an original copy of the Grant of Probate along with any other information they need to process the closure or transfer of the ISA so they can distribute the assets as required.
If you’re applying for an APS additional allowance, then you’ll still need to follow the above steps and apply to each ISA provider for an APS for the ISA your partner held with them. This doesn’t mean that you’ll have to hold an ISA account with this provider, but that you’ve ringfenced the value of the ISA to use elsewhere. If you aren’t sure of your next steps, the best thing to do is to contact your partner’s ISA provider directly and they’ll be able to tell you their process.
If you’re transferring a stocks and shares ISA, again it’s best to contact the ISA providers directly and they will talk you through what needs to be done.
How to use an inherited ISA or APS
If you’ve inherited an ISA, or an APS from your husband, wife or civil partner after they’ve died, there’s a few things you might want to bear in mind when using them:
You can use your APS with a different ISA provider
You need to apply for an APS from the ISA provider your partner held their ISA with, but once you’ve registered it, you can transfer it to another provider, or stay with the existing provider. Bear in mind though that ISA providers don’t have to accept money from an additional permitted subscription/ inherited ISA allowance.
You can add to your current ISAs
You can use your inherited ISA allowance to add to an ISA you already have, or you can open a new ISA. However, you can only have one additional permitted subscription ISA – so you have to put all the money with the same manager.
There’s a time limit on using your APS
You have three years from the date your husband, wife or civil partner died to use your inherited ISA allowance/additional permitted subscription, or 180 days from when probate has been completed (whichever is later).
Your deceased spouse’s ISA assets can be transferred into a new ISA
You have two main options if you want your deceased spouse’s ISA assets to be transferred to a new ISA. You can either ask the ISA provider to sell the ISA investments, so you can open a new ISA with the cash proceeds, or you can ask for the ISA investments to be transferred directly as they stand. This is known as an ‘in specie transfer’ and is only allowed if the assets are transferred to an ISA with the deceased person’s provider.