If an Isa holder dies, then Mark Williams, business line manager for inheritance tax planning at Octopus, warns the investments in the Isa will lose their tax-favoured status.
Mr Williams says the Isa wrapper falls away, and investments are either liquidated or transferred to the deceased’s beneficiaries.
Unfortunately, Mr Williams says while Isas are very tax efficient during an investor’s lifetime, with an exemption from income and capital gains tax, they are far from tax efficient on death.
He points out investments in an Isa can be liable to 40 per cent inheritance tax if the value of an estate falls above the nil rate band, meaning that beneficiaries effectively have to pay back much of the tax relief enjoyed during the investor’s lifetime.
Peter Shipp, director of investment schemes for the Tax Incentivised Savings Association (Tisa), says under current rules, partners can inherit the money held in an Isa but lose access to the tax relief.
Mr Shipp says his organisation believes it would be fairer if widows and widowers inherited their partner’s Isa.
