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Daily Express: Are ISAs exempt from inheritance tax?

ended 27. February 2023

Are ISAs exempt from inheritance tax? 

A journalist on the Daily Express would like an expert to explain the ISA inheritance tax rules ….. and to include commentary on rules regarding transferring ISAs to spouses,  and what crucial advice people should be aware of when dealing with this?
 

Need quick responses on this.


 

3 responses from the Newspage community

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Editor
Samuel Mather-Holgate
Independent Financial Adviser at Mather and Murray Financial
If your spouse dies, you will normally be permitted to inherit their ISA balance as an additional permitted subscription (APS). For example, if they had £50,000 in ISAs when they died your ISA allowance would be £70,000 instead of the usual £20,000 for that year to allow you to close your spouse's ISA and add it to yours.

Inheritance tax (IHT) is payable on most ISA's though, so if you are over the IHT allowance you'll have to pay 40% tax on the balances. That said, there are some innovative ISAs that invest in AIM listed shares that attract business property relief that means after 2 years IHT is levied at 0% on these types of ISAs.
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Tim Mottram
Financial Planner at Grey Parrot Financial Planning
ISAs are not exempt from inheritance tax. If you are not married, your ISAs are included in your estate and subject to IHT if you are over the threshold allowance. If you are married, there is a spousal exemption which means no IHT is paid on first death. However, ISAs can be transferred on first death to a surviving spouse and kept within the ISA wrapper. On second death, the ISAs are then subject to IHT.

Pensions are not subject to IHT. So when planning for income in retirement, investors may want to consider spending ISAs first and pensions second if their goal is also to reduce potential IHT. Some clients we speak to are initially surprised at the idea of spending their tax-free ISAs, but it makes sense when you look at the logic.
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James Wyman
IFA at Lyndhurst Financial Management
An ISA is a tax wrapper and is classed as inside of the estate for Inheritance Tax (IHT). If married, you can pass the ISA to your surviving spouse on death with assets passed between spouses exempt from IHT. In reality, you would not inherit the ISA, instead, receive an additional ISA allowance (APS) equal to that of the spouse's ISA at date of death or date funds moved across, whichever value is higher.
On second death IHT would be applicable if total assets exceed available allowances, the ISA funds could still be free from IHT depending on the underlying investment asset. If Business Relief qualifying investments been held for 2 years within the ISA then it would have a Nil value for the IHT calculation.
Crucial to claim the APS as it can be lost if not claimed within 3 years.