Death, tax and ISAs
Is tax payable on ISAs after someone has died?
Individual savings accounts have a number of tax advantages and recently these have been extended so that they apply during the administration of a deceased person’s estate. However, these advantages are sometimes misunderstood. We summarise the extent to which ISAs are tax exempt in the administration of an estate.
Income tax and capital gains tax
During an individual’s lifetime any interest received on a cash ISA is free from income tax and any dividends from stocks and shares ISAs are exempt from the dividend tax, regardless of the amount of interest and/or dividends received. Any capital gain made on the sale of a stocks and shares ISA is similarly free from capital gains tax. It was previously the case that once the ISA holder died the ISA would lose this tax favoured status. Any income received during the course of the administration of the estate would be subject to income tax at the executors’ rate and any gain on the disposal of a stocks and shares ISA would be subject to capital gains tax if the gain exceeded the executors’ annual capital gains tax exemption.
Thankfully since 6 April 2018 this has no longer been the case and ISAs continue to enjoy tax favoured status for income tax and capital gains tax while an estate is being administered. This advantage is subject to time limits so the tax treatment comes to an end when the administration of the estate is finalised, the ISA account is closed or three years after the ISA holder’s death has elapsed, whichever occurs first.
ISAs and inheritance tax
ISAs are not free from inheritance tax (IHT). If they are given on your death to your surviving spouse or civil partner they will not be subject to IHT because of the spouse exemption. If, however, an ISA is given to any other beneficiary, or forms part of the residue of an estate left to non-exempt beneficiaries, IHT is potentially payable on the value of the ISA at the date of the holder’s death, depending on the value of the whole estate.
Transfer of ISA allowances to a surviving spouse
Since 6 April 2015 it has been possible for a deceased person’s ISA allowance to be transferred to his surviving spouse or civil partner. This means that the deceased’s spouse will be entitled to an additional ISA allowance equal to the value of the deceased’s ISAs at the date of his death.
For example, Margaret is married to John. John dies leaving his entire estate to Margaret including ISAs with a date of death value of £60,000. In addition to her own ISA allowance for 2018/19 of £20,000, Margaret is able to use John’s allowance of £60,000. If Margaret wishes to use cash to subscribe for additional ISAs in her name of £60,000 then she has to do so within 180 days (about six months) of the administration of John’s estate being completed or by the end of three years after John’s date of death (whichever is the later.)
Alternatively, Margaret can choose to transfer John’s ISAs into her name without realising them as long as the ISAs have remained with John’s ISA manager until she makes a decision to transfer them. Margaret must make the subscription within 180 days of the beneficial interest in the ISAs being transferred to her by the executors.
There is one complication that Margaret will have to bear in mind: it is the value of the ISAs at the date she subscribes for them that counts towards her additional allowance. If say John’s ISAs are worth £65,000 by the time she subscribes then only £60,000 can be subscribed. Similarly, if the value has fallen to £55,000 Margaret could add an additional £5000 in cash to the subscription.
In summary – when ISAs are subject to tax
- ISAs are free of income tax and capital gains tax during the holder’s lifetime
- ISAs are free of income tax and capital gains tax during the administration of the deceased’s estate (subject to time limits)
- ISAs will be subject to inheritance tax unless left to a surviving spouse or civil partner
- A surviving spouse will acquire equivalent ISA allowances to the value of your ISAs at the date of your death.
Contact an inheritance tax specialist
For inheritance tax advice, please call 0800 652 8025 or contact us online. Your initial consultation is free. Our specialist solicitors are based in Birmingham, Bristol, Cardiff, London, Manchester, Southampton and Taunton are ready to discuss your case.