What happens to your ISA when you die?

The general rule is that ISA savings can be effectively added to your spouse’s ISA, and then passed on to any beneficiaries named in your will, or, if you don’t have a will, through the laws of intestacy. 

The tax implications of this could be significant. ISAs can form part of your estate. So, if your estate is liable for inheritance tax, your ISA could be caught too. 

Remember, tax rules can change and benefits depend on circumstances. IHT portfolios and AIM ISAs are high risk and for experienced investors only. IHT planning can be complicated, so if you’re not sure, please seek professional tax advice. 

A more favourable treatment if you have a spouse or civil partner

Since April 2015 it is effectively possible to pass on your ISA to a surviving spouse or civil partner without them losing the benefit of tax-free income and growth. 

In practice, on your death, your surviving spouse or civil partner will receive a one-off ISA allowance (known as an Additional Permitted Subscription or APS) equal to the total value of your ISAs. This means they can add your ISA to theirs upon your death, and continue benefitting from tax-free income and growth whilst the funds remain in the ISA. However, upon their death, the ISA would form part of their estate and could then potentially be subject to IHT. In other words, the IHT on your ISA might be only deferred.

Can I put my ISA in trust?

ISAs are individual savings accounts and can only be held by an individual, not by a legal entity such as a trust. 

You could, however, sell the ISA assets and put the proceeds in trust. They would no longer qualify for the ISA benefits of tax-free income and growth but could become IHT free, provided you live at least seven years after the trust has been established. 

Once in a trust, the assets cannot normally be accessed by you. In addition, a trust might have similar obligations to those of a company: annual accounts and tax returns may be required and tax may be payable on entry and exit of money to and from the trust and every ten years. 

An alternative for experienced investors

If your ISA is invested in AIM shares that qualify for BPR, it could potentially be passed on IHT free – to your spouse or anyone else. 

So, if you hold an AIM ISA portfolio, you could potentially benefit from a three tax reliefs: no income and no capital gains tax whilst you live, plus no IHT after your death. Remember, tax rules can change and benefits depend on circumstances.

How do AIM ISAs work?

As the name suggests, AIM ISAs (or AIM Inheritance Tax ISAs) are portfolios of AIM companies that should qualify for BPR. 

What might an AIM ISA look like?

• You have the same allowance – £20,000 this year (but you can transfer in unlimited amounts). 
• Once invested, any growth and income are tax free. 
• Importantly, you remain in control of your money: you can take a regular income, make withdrawals or take the whole pot in cash if you need.

First, unlike a conventional Stocks & Shares ISA, your AIM ISA should be IHT free after two years. 

Second, your money is invested in AIM shares, which are considerably riskier and less easy to sell than those listed on the main stock market, so you should only invest if you have significant other assets to fall back on.

That said, a typical portfolio will be diversified across 20-40 companies, usually in different sectors. Each fund manager will have their own investment strategy and select the portfolio companies accordingly, but they will aim to deliver some growth whilst trying to mitigate volatility – although all AIM portfolios are likely to be more volatile than a conventional stocks and shares ISA. Remember, capital is at risk and you should not invest money you cannot afford to lose. 

Why consider a ready-made portfolio?

Whilst it is always going to be cheaper to adopt a DIY approach, ready-made portfolios are usually the simplest and quickest route for several reasons:

1. Company selection

Around 850 companies are listed on AIM. Some will have the potential to be good investments but it takes talent, experience, time and expertise to find them. A professional manager will typically have a team of analysts doing research. 

2. BPR-qualifying status

Not all AIM shares qualify for BPR and HMRC does not provide a definitive list. In addition, some may only offer partial IHT relief, or their qualifying status may change over time. A professional manager will monitor portfolio companies to ensure they remain qualifying.

3. Diversification

A portfolio typically gives investors exposure to a number of companies. It would take time and effort – and possibly a larger capital outlay – for a private investor to mirror that.

4. Relative ease of obtaining funds on death

On your death, your heirs can decide to keep the portfolio invested or liquidate it. An established provider will have been through the process many times before and should be able to assist. They should make available the relevant form to submit to HMRC and have all the records in place to demonstrate when the investment was made. This could be more difficult and time-consuming with a self-select portfolio, where you’re responsible for record keeping and your heirs for liquidating each investment.

How to invest

Many respected specialist asset managers offer ready-made ISA portfolios. You can see available offers, read our reviews and watch manager video interviews online.

If you have any questions at all, please call us on 0117 929 0511 or send an email to [email protected] – you’ll get straight through to someone knowledgeable.