Millions of people across the UK have an Individual Savings Account (ISA). While Cash ISAs are the most popular type of ISA, plenty of people have invested in Stocks and Shares ISAs as well. Whichever type you have, their tax-free status means they’re a popular way to save.
In some cases, this means there may still be funds in your ISA when you die. So, what happens then? In this blog we’ll explore the options for dealing with an ISA when someone dies, including whether you can inherit an ISA, and if you need probate to transfer an ISA.
What happens to an ISA when someone dies?
When someone dies, any savings or investments held in an ISA will be passed on to the beneficiaries of their estate. This could be anyone that’s named in their Will.
As ISAs form part of your estate when you die, they will need to be include in the wider estate administration process. This is often referred to as probate.
During this period, ISAs are categorised as continuing ISAs. This means that while no new funds can be paid in, they retain their tax benefits. As a result, there won’t be any tax to pay on any income or capital gains made by ISAs while the estate administration process takes place.
This situation will continue until either the estate administration process is complete, the account is closed by the executor, or three years and a day have passed since the account holder’s death.
Can you inherit an ISA?
While you won’t inherit the ISA itself, it is possible to inherit the funds in an ISA. This means you can’t transfer the existing account into your name, even if you’re named as the beneficiary in the deceased’s Will. The funds must be moved into an existing account in your name, or to a new account that you set up.
Additionally, regardless of who inherits the funds in an ISA, inheritance rules allow a spouse or civil partner to inherit the tax-free value of an ISA when someone dies. This is done via an Additional Permitted Subscription (see below for details).
Can an ISA be transferred on death?
While it isn’t possible to transfer a Cash ISA, it may be possible to transfer a Stocks and Shares ISA. Read on to find out how this works.
What is an Additional Permitted Subscription?
An Additional Permitted Subscription (APS) is an extra ISA allowance that becomes available to you when your spouse or civil partner dies. It allows you to increase your own ISA allowance up to the value of the ISA your partner held.
So, you’re not actually inheriting the ISA itself. Just the additional allowance you can use to put money into your own ISA.
It’s worth noting that even if your spouse or civil partner leaves the funds in their ISA to someone else, you can still benefit from an APS to the same value. So, if their ISA was worth £35,000 at the time of their death and they left the funds to their children, you’d still be entitled to an APS allowance of £35,000.
To qualify, you must have been married or in a civil partnership with someone at the point they die and have been living with them. You must meet both these criteria to qualify. This means that if you were separated, or weren’t living with them, you won’t qualify. However, don’t be concerned if your partner was living in a care home prior to their death, as this won’t disqualify you from the APS.
It may be possible to transfer the funds you inherit into various types of ISA, including a Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, or a Lifetime ISA. There is a cap of £4,000 on single transfers into Lifetime ISAs though. Not all providers accept APS transfers, so make sure you do your research and confirm that the account you plan to use does.
For example, if your spouse or civil partner’s ISA was worth £30,000 at the time of their death, you can use that £30,000 allowance to make a subscription into an ISA that accepts APS. This would be added to your personal annual ISA allowance for the previous tax year.
You can apply for an APS allowance up to three years after the date of death, or 180 days after the estate administration is complete, whichever is later. However, if you’re planning to use an APS for a Stocks and Shares ISA transfer, you must complete this within 180 days of the distribution of assets to the deceased’s spouse. Investments in a Stocks and Shares ISA can be transferred without being sold, as long as both parties have the same ISA provider.
Do I need probate to transfer an ISA?
While probate is required to deal with many aspects of someone’s estate, it may not be required to claim the APS allowance. If you’re the deceased’s spouse or civil partner, you may only need to provide a copy of the death certificate and proof that you were married or civil partners, to transfer the APS.
Stocks and Shares ISAs are likely to need to go through probate before the assets can be transferred. It’s therefore always worth checking with the ISA provider to confirm what your options are.
Probate may also be required for any kind of ISA if you’re dealing with a large or complex estate.
As with any matter relating to financial affairs, if you’re unsure about anything, speak to the relevant professionals for advice. This may be the bereavement team at your late spouse or civil partner’s current financial institution. Alternatively, you may want to speak to a probate solicitor, an accountancy firm that is authorised to provide probate services, or a professional executor service, which is offered by some banks or specialist firms.
If you think an APS could apply to you, it may be worth speaking to us about opening an APS ISA. We can check if you’re eligible and help you decide if an APS ISA might be right for you.
