ISA and Inheritance Tax UK (2026): Are ISAs Subject to IHT When You Die?
Updated 13 May 2026 · 8 min read · England & Wales
An ISA is one of the UK’s most tax-efficient savings wrappers — protecting your money from income tax and capital gains tax year after year. But there is a common and costly misconception: ISAs are not exempt from inheritance tax. When you die, the ISA wrapper disappears and the full value forms part of your taxable estate.
The ISA IHT myth: why it matters
Many people spend decades building up large ISA portfolios — sometimes worth hundreds of thousands of pounds — under the impression that they are fully “tax-free”. The income tax and CGT advantages are real and significant. But on death:
- The ISA wrapper ceases — the investments or savings become part of the estate
- The full market value at the date of death is included in the IHT calculation
- If the estate exceeds the nil rate band, 40% IHT applies to the ISA value along with everything else
Example: an estate worth £800,000 including a £200,000 ISA, with a single nil rate band of £325,000, faces IHT of £190,000. The ISA contributes £80,000 of that IHT bill — money that could have been saved with planning.
What happens to an ISA on death
| ISA type | What happens on death | IHT position |
|---|---|---|
| Cash ISA | Administered as part of estate; executor claims or closes | Subject to IHT at market value on death |
| Stocks & shares ISA | Administered as part of estate; sold or transferred by executor | Subject to IHT at market value on death |
| AIM ISA (BPR-qualifying) | BPR assessed on each qualifying share at date of death | Potentially exempt (100% BPR on qualifying shares held 2+ years) |
| Lifetime ISA (LISA) | 25% penalty waived; executor withdraws; forms part of estate | Subject to IHT |
| ISA left to surviving spouse | Spouse exemption applies; APS allows surviving spouse to retain ISA wrapper | IHT-exempt on first death (spouse exemption); IHT on second death |
The Additional Permitted Subscription (APS) for surviving spouses
When a person with an ISA dies, their surviving spouse or civil partner can make an Additional Permitted Subscription (APS) to their own ISA — equal to the value of the deceased’s ISA — in addition to their normal annual allowance. This effectively preserves the ISA wrapper for the survivor.
- The APS equals the ISA value at death (or when closed by the estate, if higher)
- Must be claimed within 3 years of death (or 180 days after estate administration is complete, if later)
- Available from the deceased’s ISA provider or the survivor’s own provider
- Preserves the income tax and CGT advantages — but does not reduce IHT on the first death
The AIM ISA: a potential IHT solution
Shares in AIM-listed companies can qualify for Business Property Relief (BPR) at 100% after being held for 2 years. An ISA invested in BPR-qualifying AIM shares can therefore be outside the estate for IHT after 2 years — while retaining income tax and CGT advantages during lifetime.
Significant caveats:
- Not all AIM shares qualify for BPR — HMRC assesses qualification at the date of death
- AIM is a higher-risk market than the main London Stock Exchange
- Specialist investment management is required
- Not suitable for investors who cannot afford capital losses
- Tax relief changes could affect BPR eligibility
Take independent financial advice before investing in an AIM ISA for IHT purposes.
Frequently asked questions
Are ISAs subject to inheritance tax when you die?
Yes. ISAs are fully subject to inheritance tax on death in England and Wales. The ISA wrapper — which protects investments and savings from income tax and capital gains tax during the holder's lifetime — loses its tax-advantaged status on death. The value of the ISA at the date of death forms part of the estate and is included in the IHT calculation. If the estate exceeds the nil rate band (£325,000 in 2026/27, or up to £1 million for couples using all available thresholds), the ISA value is taxed at 40% along with the rest of the estate. This is a common misconception: many people assume their ISA is tax-free for all purposes. Income tax and CGT — yes; IHT — no.
What happens to an ISA when the holder dies?
On the ISA holder's death: (1) The ISA loses its tax-advantaged wrapper — it becomes a regular investment or savings account in the estate. (2) Any income or gains arising after the date of death may be taxable (though the estate has a limited income tax and CGT allowance during administration). (3) The executor administers the ISA as part of the estate — it must be included in the IHT400 (or IHT205 for excepted estates) at its market value on the date of death. (4) The ISA funds are eventually distributed to beneficiaries as part of the estate residue or a specific legacy. There is no special 'ISA death benefit' — the ISA simply becomes a regular asset in the estate.
Can a spouse inherit an ISA without losing its tax-free status?
Yes — the Additional Permitted Subscription (APS) allows a surviving spouse or civil partner to make an additional ISA subscription equal to the value of their deceased spouse's ISA, in addition to their own annual ISA allowance. This effectively allows the surviving spouse to 'inherit' the ISA wrapper. The APS allowance equals either the value of the ISA at the date of death or the value when the ISA is eventually closed by the estate — whichever is higher, if the ISA continues to be held by the estate during administration. The APS must be used within 3 years of the deceased's death (or 180 days after the estate is fully administered, if later). The APS preserves the income tax and CGT advantages for the survivor — it does not affect IHT on the first death.
What is an AIM ISA and does it avoid inheritance tax?
An AIM ISA (or AIM stocks and shares ISA) is a stocks and shares ISA invested in shares listed on the Alternative Investment Market (AIM). Some AIM-listed shares qualify for Business Property Relief (BPR) at 100% — meaning they fall outside the estate for IHT after being held for 2 years. If the ISA is invested entirely in BPR-qualifying AIM shares, the entire ISA value could be IHT-exempt after 2 years — while retaining the income tax and CGT advantages of the ISA wrapper. Risks: AIM shares are higher risk and less liquid than main-market shares; not all AIM shares qualify for BPR (HMRC assesses qualification at date of death); if the market falls sharply, the IHT saving may be outweighed by capital losses. This strategy is not suitable for all investors — take specialist financial advice.
Does a Lifetime ISA (LISA) have different IHT treatment?
A Lifetime ISA is treated the same as other ISAs for IHT purposes — it forms part of the estate on death and is subject to IHT. There is no special IHT exemption for LISAs. The LISA's advantages (25% government bonus, tax-free growth) are income tax and CGT benefits, not IHT benefits. On death before the LISA is used for a qualifying purpose (first home or age 60), the executor can withdraw the funds — the standard 25% withdrawal penalty is waived on death. The full value (including the government bonus and growth) forms part of the estate.
How can I reduce IHT on my ISA?
Options: (1) AIM ISA — invest in BPR-qualifying AIM shares within the ISA wrapper (specialist advice required; higher risk). (2) Spend the ISA during lifetime on experiences or gifts within the annual exemption. (3) Use the ISA to fund regular gifts under the normal expenditure out of income exemption (s21 IHTA 1984) — if ISA withdrawals are treated as income for this purpose. (4) Leave the ISA to a surviving spouse (using the spouse exemption for IHT on the first death), and the survivor uses the APS to maintain the ISA wrapper. (5) Redirect estate planning to reduce the overall estate: gifts with reservations, life insurance in trust, charitable legacies. There is no simple 'ISA IHT exemption' — planning requires coordinating multiple strategies.
Plan your estate to protect your savings
ISAs, property, pensions — all of it needs a well-structured will and estate plan to pass on as much as possible. WillSafe’s Essentials Bundle gives you a will, LPA guidance, and an executor guide.
Get the Essentials Bundle →Related guides
- Inheritance tax on savings — bank accounts, bonds and cash
- Business property relief — AIM shares and BPR
- Spouse exemption from IHT
- Pension IHT 2027 — pensions in the estate
- How to reduce your IHT bill