What Happens to an ISA When Someone Dies?

Many people assume that because an ISA is tax-free during life, it is also tax-free on death. This is a common misconception. The ISA wrapper ceases to have effect when the account holder dies, and the assets inside the ISA become part of the estate in the normal way. This guide explains what actually happens, what the Additional Permitted Subscription means for surviving spouses, and how executors should deal with ISAs in practice.

The ISA wrapper ends at death

For income tax purposes, the ISA wrapper is treated as ending on the date of death. Any interest or income earned inside the ISA after that date is taxable as estate income -- it no longer benefits from the ISA exemption. The account does not close immediately; the ISA provider continues to hold and administer the account during the estate administration period, and will typically continue to pay the ISA interest rate, but the tax-free status no longer applies.

The assets held inside the ISA form part of the deceased's estate. They are subject to inheritance tax in the same way as any other asset, and must be included in the estate valuation submitted to HMRC.

Inheritance tax on ISA assets

There is no special inheritance tax treatment for ISAs. The full value of the ISA at the date of death is included in the taxable estate. If the total estate exceeds the nil-rate band (currently £325,000 per person, or up to £500,000 with the residence nil-rate band for qualifying estates), inheritance tax at 40% applies to the amount above the threshold.

The spousal exemption applies as normal: if the ISA passes to a surviving spouse or civil partner, whether through the will or intestacy, no inheritance tax is due on that transfer. See our guide to inheritance tax for a full explanation of the thresholds and reliefs available.

The Additional Permitted Subscription

Although ISA assets are subject to inheritance tax in the same way as other assets, surviving spouses and civil partners benefit from a valuable concession: the Additional Permitted Subscription (APS). This allows the surviving spouse or civil partner to invest an amount equal to the value of the deceased's ISA into their own ISA, without this counting toward their annual ISA allowance (which is currently £20,000 per year).

The APS is a subscription allowance, not a direct transfer of assets. The surviving spouse does not have to move the actual assets -- they can invest their own money in the APS amount. The effect is that the surviving spouse can maintain a larger ISA portfolio than would otherwise be possible under the annual allowance alone.

How to claim the APS

The APS must be claimed from the ISA provider within three years of the date of death, or within 180 days of the completion of the administration of the estate, whichever is later. This deadline is firm -- if you miss it, the allowance is lost. The ISA provider will have an APS claim form. You will need to provide the death certificate and confirm the value of the ISA at the date of death.

The APS can be used with the same ISA provider as the deceased or a different one -- the surviving spouse can choose which provider to use for their additional subscription. This flexibility is useful if the survivor wants to consolidate ISAs or move to a more suitable product.

How executors should deal with ISAs

As executor, your responsibilities regarding ISAs are as follows:

• Notify the provider: write to the ISA provider as soon as possible after death, enclosing a death certificate. Most major platforms have a bereavement team. The provider will note the death and explain their process.
• Obtain a date-of-death valuation: the ISA must be valued as at the date of death for the estate valuation and IHT form. For cash ISAs this is straightforward. For stocks and shares ISAs, the provider will calculate the market value of the holdings at the date of death.
• Include the ISA in the estate valuation: the full value of all ISAs held by the deceased must be included in the estate accounts and on the IHT form submitted to HMRC.
• Do not sell holdings until probate is granted: you do not have authority to instruct the sale of stocks and shares ISA holdings until the Grant of Probate has been obtained. Attempting to sell without the grant can create legal complications.
• Close the ISA and pay proceeds to the estate: once probate is granted, provide the grant to the ISA provider and instruct them to close the account. The proceeds are paid into the estate account and distributed to beneficiaries in the normal way.

Cash ISAs

Cash ISAs are straightforward to deal with. The provider holds the cash during the administration period, continues to pay the ISA rate, and closes the account and transfers the balance once you provide the grant of probate. The process is similar to closing a standard bank savings account.

Stocks and Shares ISAs

Stocks and shares ISAs require a little more care. The investments must be valued at the date-of-death market price for the estate valuation -- this is typically the lower of two prices quoted on the date (the "quarter-up" rule applies to quoted shares for IHT purposes). The ISA provider will usually provide this valuation on request.

Once probate is granted, you can instruct the provider to sell the holdings and pay cash into the estate account, or -- if the will or intestacy rules mean the beneficiary will receive the ISA proceeds directly -- you may be able to transfer holdings "in specie" (without selling). Check with the provider whether in-specie transfer to a beneficiary's own account is possible.

For detailed guidance on how shares and investment portfolios are handled more generally in an estate, see our guide to shares and investments after death.

Dealing with investment platforms

All major investment platforms -- including Hargreaves Lansdown, Vanguard, AJ Bell, and Fidelity -- have dedicated bereavement teams. The process is broadly the same for each: write to the bereavement team with a death certificate, wait for the account to be noted and valued, then provide the grant of probate to authorise closure. Most platforms accept documents by post; some now accept certified copies electronically.

Allow plenty of time. ISA platforms are thorough in their bereavement procedures, and the process from notification to closure typically takes six to twelve weeks. Factor this into your estate administration timeline.

Lifetime ISAs and Junior ISAs

Lifetime ISAs (LISAs) and Junior ISAs (JISAs) have slightly different rules on death. A LISA can be closed without the 25% government withdrawal charge if the account holder dies -- contact the provider for their specific process. A JISA becomes the child's own account when they turn 18; if the child dies before 18, the JISA is closed and the proceeds paid to the estate.

See also our guide to executor duties for a full overview of the estate administration process, and our guide to closing bank accounts after death for how other financial accounts are handled.