Tax  

Death, taxes and Isas

Death, taxes and Isas

Within an Isa, interest, dividends and gains are exempt from UK income and capital gains tax (CGT). 

On the death of the investor, the Isa wrapper ceases to exist and the funds become part of the estate to be distributed according to the Will or intestacy, with no exemption from inheritance tax (IHT). 

For deaths between 3 December 2015 and 5 April 2018, an additional permitted subscription (APS) allows the surviving spouse or civil partner to make a subscription up to the value of the deceased’s Isa(s) at their date of death, without it contributing towards the normal Isa limits. 

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As the Isa ceases on death, any interest, dividends or gains that arise after death and before the APS is used are potentially subject to income tax or CGT. 

(Please note: any reference to spouse in the following also includes a civil partner.)

Isa extended beyond death

Any Isa held by an investor who dies on or after 6 April 2018 will become a “continuing account of a deceased investor”. 

Although the ‘continuing Isa’ will not be able to receive any further subscriptions, it will retain the Isa tax advantages and, subject to the Isa manager’s terms and conditions, can continue to be managed. 

The continuing Isa will still be potentially subject to IHT. This will continue until either the completion of the estate administration, the closure of the continuing Isa, or the third anniversary of death – whichever comes first. After this period the Isa wrapper will be removed. 

The introduction of a continuing Isa removes the gap between the date of death and the date that the APS is used, but it does complicate the APS valuation. 

APS valuation: single Isa

If the deceased investor had a single Isa, the surviving spouse is entitled to an APS, which is the higher of the Isa value at the date of death or the value when the Isa ceased to be a continuing Isa. 

If the spouse wanted to use part of the APS before the Isa ceases to be a continuing Isa, then this fixes the APS value as at the date of death. See Box One

APS valuation: multiple Isas

If the deceased investor had multiple Isas, the surviving spouse could choose to use either the APS value at date of death, or the value at date of closure. This is with the proviso that they must use the same date for all Isas held with the same Isa manager – it would not be possible to use the date of death for one Isa and the date of closure for another. See Box Two

Lifetime Isa

If a Lifetime Isa (Lisa) investor dies, the value of the Lisa includes any government bonuses due to be paid on subscriptions or payments made before the date of death. 

A surviving spouse can use an APS to pay into their own Lisa. Although this payment would not count towards the £20,000 Isa allowance, it would count towards the £4,000 Lisa allowance.