ISAs can be a great, tax-efficient way to save. But what happens to them when you die?
We know, we know, it’s not the cheeriest of topics, but it’s an important one. And we think you’ll be pretty pleased with the answer. Your loved ones will be able to reap all the benefits of your ISA once you’ve gone, even though you won’t be around to enjoy it yourself! Here’s the lowdown.
What is an ISA?
ISA stands for Individual Savings Account. It’s basically a savings account that makes it really easy to grow your money without having to pay tax on it. Kerching!
1. Cash ISAs
A Cash ISA is a savings account where you don’t have to pay tax on the interest you earn.
If that sounds like gobbledygook to you, don’t worry. Interest is a kind of charge that you either pay when you borrow money, or receive when you lend money. It’ll be a percentage of what you either borrow or lend.
With a Cash ISA, you can earn interest on the money you put in there. And, better still, you won’t have to pay tax on any of the interest you receive!
You can get fixed-rate Cash ISAs, which last for a set period of time and guarantee you a certain amount of interest. However, these will charge you a hefty fee if you need to take your money out during that time. Or, you can get instant-access ones, where you can put in and take out money whenever you want – but the interest rates will be a bit lower to make up for it!
2. Stocks and shares ISAs
A Stocks & Shares ISA is also known as an investment ISA. It’s basically a tax-efficient investment account, which means it’s much better at making money for you than a Cash ISA.
Any money you put into a Stocks & Shares ISA will get invested in stocks and shares for you (those are basically ownership stakes in companies). The idea is that these companies should grow and become more valuable – and when they do, you’ll make money. Woohoo!
As if that wasn’t enough, the really good thing about investing through a Stocks & Shares ISA is that you won’t have to pay any tax on the returns you make. That includes no Capital Gains Tax (a tax that’s charged when you sell something that’s increased in value, including stocks), and no dividend tax (a tax on payments you might get from certain companies who give cash to people who have shares). Not bad, eh?
Of course, it’s not guaranteed that you’ll make money. But it’s very likely that you will. Ultimately, it’s a great way of investing tax-free so that you can save for your future (and let’s be honest, saving is something we should all be doing more of!).
The 2 we’ve mentioned above are the main kinds of ISAs. However, there are a few more niche types that you may also come across. These are:
- Innovative finance ISAs. An Innovative Finance ISA is a bit like a Stocks & Shares ISA. But instead of your money getting invested with the help of a bank like it normally would with a Stocks & Shares ISA, you lend your money directly to companies or individuals who you find via online platforms called ‘peer-to-peer lenders,’ like Funding Circle. This is high risk so it’s probably not for you if you don’t have experience investing!
- Lifetime ISAs. A Lifetime ISA (also known as a LISA) is a special kind of ISA that helps you save for buying your first home or to tide you over later on in life. The government will add 25% to whatever you pay in, up to £4,000 per year. However, you can only take the money out once you turn 60, unless you’re diagnosed with a terminal illness or using it to buy your first home. Otherwise, you'll be charged a hefty 25% penalty.
- Junior ISAs. Junior ISAs are savings accounts for children. They have to be opened by a parent or guardian, but the money you put in it will belong to the child. You can get either a Cash Junior ISA or a Stocks & Shares Junior ISA.
So, what happens to your ISA when you die?
When you die, your ISA will become something called a ‘continuing ISA’ for a limited period of time. During this time, your ISA can continue to grow and keep its tax benefits, although now that you’ve gone, no more money can be added.
Your ISA will be kept open as a ‘continuing ISA’ until either:
- Your executor closes it. Your executor is the person responsible for carrying out the instructions you leave in your will and sorting out your estate – that’s things like your money, property and belongings.
- The administration of your estate is completed. That means when your executor has finished sorting out your money, property and belongings. This will include paying your debts and taxes as well as giving your money, property and possessions to the people you’ve left them to in your will.
If neither of these things has happened after 3 years and 1 day, your ISA provider will close your ISA.
However, what you’re probably wondering is… well… who gets to benefit from your ISA?! Which brings us onto...
Can you inherit an ISA?
Your loved ones can inherit your ISA once you’ve passed away. In fact, you can leave your ISA to whoever you want in your will (hence why it’s super important to get your will sorted out sooner rather than later!).
If you’re leaving your ISA to your spouse or partner, they’ll probably be able to inherit your ISA savings through something called an ‘inherited ISA allowance,’ also known as an ‘additional permitted subscription’ (APS).
If you’re thinking ‘Huh? What the hell’s that?!’ then don’t worry. Let’s rewind a little.
When you get an ISA, you’ll be limited to how much you can put into it each year, known as your ‘allowance.’ This is the government’s way of controlling how much tax-free growth your money can make. Exactly how much the allowance is can change, but at the moment it’s £20,000 per year.
However, the ‘inherited ISA allowance’ means that your spouse or partner can add the value of your ISA to their normal allowance, in order to be able to inherit it – only your spouse or partner though, and not anyone else.
Imagine your ISA is worth £40,000 when you pass away. Assuming you’ve left your ISA to your spouse, they’ll get the normal £20,000 allowance for the year just like everyone else, PLUS an extra £40,000 allowance so that they can inherit your ISA. Altogether, their allowance for the year would be £60,000.
Now, we bet we know what you’re thinking. What happens if you don’t want to leave your ISA to your spouse or partner?
Well, that’s totally fine, you can leave it to whoever you want. But they won’t get the additional allowance. Instead, the value they inherit will count towards their standard yearly £20,000 allowance.
Meanwhile, your partner can still claim the extra allowance even if they don’t get your ISA. But this won’t be too useful for them unless they have more than £20,000 of their own cash to add to their ISA in the first place!
What can your loved ones do with your ISA?
Your loved ones can choose what they want to do with the value of your ISA. However, exactly how that works will depend on what kind of ISA you have.
If you have a Cash ISA, they can choose between:
- Keeping the money with the ISA provider it’s currently with. Your ISA provider is the organisation that gave you your ISA.
- Adding the money to their own ISA if they have one. Just bear in mind that not all ISA providers will be happy to accept inherited funds.
- Opening up a new ISA to put the money in. This could be any kind of ISA and doesn’t necessarily have to be a cash one.
If you have a Stocks & Shares ISA, they can choose between:
- Selling your investments for cash. The cash they get from doing this could be used to open a new ISA, which is known as a ‘cash transfer.’
- Transferring the investments as they are. If they want to transfer the investments elsewhere without selling them, this is called an ‘in specie’ transfer.
Normally, you can only open 1 Cash ISA and 1 Stocks & Shares ISA each year. However, if your loved one is opening up a new ISA purely because they’re transferring inherited savings, it’s okay to open up a second one in the same year.
That said, you can only use your inherited ISA allowance once. So, your loved one won’t be able to keep moving the inherited money around without it counting towards their yearly allowance of £20,000.
How does tax work on inherited ISAs?
Before your ISA is closed (while it’s still a ‘continuing ISA’), it can continue to grow and keep its tax benefits. In other words, even though nobody can add more money to it, it can still increase in value without being subject to income tax or Capital Gains Tax.
However, it will be subject to inheritance tax – unless you leave it to your spouse or partner.
Inheritance tax is a kind of tax that gets charged on the property and belongings of someone who dies. If everything you own (known as your ‘estate’) adds up to more than £325,000, a tax of 40% will be charged on anything over that £325,000 threshold.
Your ISA will form part of your estate, which means its value will be added to everything else you own. And, if everything you own (including the value of your ISA) adds up to more than £325,000, the government will charge income tax on it.
BUT there’s one big exception. Anything you leave to your spouse or civil partner won’t be subject to inheritance tax. That means if you leave your ISA to your partner, they can inherit it for free.
It’s really important to save for the future, and an ISA can be a great way to do that – especially a Stocks & Shares ISA, which will typically get you some great returns if you leave your money in there for long enough and all without you having to pay tax on it! Even better, your hard efforts won’t go to waste if you pop your clogs, as your loved ones will be able to inherit your ISA and benefit from all the savings you’ve managed to squirrel away and grow during your lifetime.
If you don’t yet have an ISA, you can fin the best one for you with our comparison table of the best investment platforms UK.