Introduction
ISA inheritance tax is the part of the ISA story that rarely gets explained at the point you open the account. An ISA shelters your money from Income Tax and Capital Gains Tax for as long as you hold it. It does not shelter it from Inheritance Tax when you die.
That distinction matters more every year. The nil rate band has stood at £325,000 since April 2009 and is frozen until April 2031, so estates grow while the threshold does not. From 6 April 2027, most unused pension funds join the Inheritance Tax net as well, removing what had been the most effective shelter many families had.
This guide sets out the general ISA inheritance tax rule, the three genuine exceptions, and the points where official guidance leaves real room for doubt. Every figure below comes from GOV.UK, HMRC or the underlying legislation, verified on 24 September 2026.
The information provided on this page and throughout the website is for general information purposes only and does not constitute financial advice. It is important that you conduct your own research and consider your own personal circumstances before making any investment decisions.
Quick Answer: How ISA Inheritance Tax Works
The ISA inheritance tax position is simple: ISAs are free of Income Tax and Capital Gains Tax, but not of Inheritance Tax. Your ISA forms part of your estate and can be taxed at 40% above the available thresholds. Leaving it to a spouse or civil partner is exempt, and they can also inherit your ISA allowance.
The General Rule: Why ISA Inheritance Tax Applies At All
GOV.UK puts it in one sentence: “ISA investments will form part of your estate for Inheritance Tax purposes”. There is no ISA specific relief, no separate allowance and no reduced rate. An ISA is an asset you own, and on death it is counted like any other.
What decides whether tax is actually due is the size of the estate measured against the thresholds. For the 2026/27 tax year those are as follows.
| Threshold or rate | 2026/27 tax year |
|---|---|
| Nil rate band | £325,000 |
| Residence nil rate band | £175,000 |
| Combined, home to direct descendants | £500,000 |
| Residence nil rate band taper threshold | £2,000,000 |
| Standard rate above the thresholds | 40% |
| Reduced rate, 10% or more of the net estate to charity | 36% |
Source: GOV.UK Inheritance Tax guidance and the House of Commons Library briefing on Inheritance Tax. Both thresholds are frozen until April 2031. Verified 24 September 2026.
The residence nil rate band only applies where a home passes to direct descendants, and it falls by £1 for every £2 the estate is worth above the £2,000,000 taper threshold. An estate of £2,350,000 loses it altogether.
Two people can combine unused thresholds, which is where the widely quoted £1,000,000 figure comes from. It is a maximum for a couple leaving a home to children, not a standard allowance, and an ISA does nothing to increase it. If you are a long way from that point and simply want to see how a pot compounds over the decades before any of this becomes relevant, our compound interest calculator is the more useful starting point.
What The Continuing ISA Actually Protects
Your ISA does not close the moment you die. Since 6 April 2018 it becomes what the legislation calls a continuing account of a deceased investor, and the Income Tax and Capital Gains Tax shelter carries on inside it.
Under regulation 2G of the Individual Savings Account Regulations 1998, that status runs from the date of death until the earliest of three events: completion of the administration of the estate, the third anniversary of the death, or the point at which everything in the account is withdrawn. GOV.UK gives the practical version: the provider will close the ISA three years and one day after death if nothing else has ended it first.
Two limits are worth knowing. No new subscriptions can be made into a continuing account, so it cannot be topped up. And the protection covers Income Tax and Capital Gains Tax only. It does nothing about Inheritance Tax, which is assessed on the value at the date of death.
Three years and one day
That is the longest an ISA can hold its Income Tax and Capital Gains Tax shelter after death. Nothing in the regulations extends it, however long probate takes.
Exception One: Leaving Your ISA To A Spouse Or Civil Partner
The first exception is not really an ISA rule at all. Transfers between spouses and civil partners are generally exempt from Inheritance Tax, and an ISA left to one is covered by that exemption like any other asset. A £200,000 ISA passing to a husband, wife or civil partner is taxed at nothing.
The common misunderstanding is what actually passes. The money passes. The wrapper does not. Your ISA is closed, and the assets move into the survivor’s own name, taxable in the ordinary way, unless the allowance described next is used to put them back inside an ISA.
Everyone else, including children, grandchildren, siblings and unmarried partners, receives the ISA as part of the taxable estate. There is no exemption for an ISA left to a child, and that is where most of the surprise sits. ISA money is treated very differently by different tests: it is invisible to the income test that claws back the Winter Fuel Payment, for example, but entirely visible to Inheritance Tax.
Exception Two: The Additional Permitted Subscription
The second exception is a genuine ISA rule and it is routinely missed. A surviving spouse or civil partner is entitled to an additional permitted subscription, usually shortened to APS. It is a one off extra ISA allowance equal to the value of the deceased’s ISAs, sitting on top of the ordinary £20,000 allowance for the 2026/27 tax year.
The amount is the higher of the value at the date of death or the value at the point the account stopped being a continuing account. Where the investments rose during administration, the higher figure applies. To qualify you must have been living together at the date of death, and not separated under a court order or a deed of separation.
Cash deadline
Three years from the date of death, or if later, 180 days after the administration of the estate is complete.
In specie deadline
Where the investments themselves are moved rather than sold, 180 days from beneficial ownership passing to the survivor.
Used properly, the APS lets a surviving spouse hold a substantially larger ISA than the annual limit alone would permit. Left too late, the allowance simply expires.
Exception Three: AIM Shares And Business Relief
The third exception is narrow, riskier than it looks and less generous than it used to be. Shares quoted on AIM can qualify for business relief, and business relief reduces the Inheritance Tax value of an asset. AIM shares can be held inside a stocks and shares ISA, so the two can be combined.
From 6 April 2026 the relief on those shares is 50%, not the 100% it was before. The government’s summary of the reforms is explicit that for shares “not listed” on the markets of recognised stock exchanges, such as AIM, “the rate of relief will be 50%”, and that the separate allowance for agricultural and business property does not apply to them. That allowance was itself raised from £1,000,000 to £2,500,000 in an announcement on 23 December 2025, which left AIM treatment unchanged.
In practice that turns a 40% charge into an effective 20% one, on assets that must normally have been held for two years and whose qualifying status can be lost. It is not a beginner strategy: AIM companies are small, illiquid and considerably more volatile than a mainstream global tracker.
The chart below sets the three outcomes side by side. A £100,000 ISA left to a spouse or civil partner passes in full, qualifying AIM shares pass at £80,000 after 50% business relief, and an ISA left to a child from an estate already above the thresholds passes at £60,000 once 40% Inheritance Tax is applied.
Source: rates and reliefs from GOV.UK Inheritance Tax guidance and the government summary of the agricultural and business property relief reforms. Figures are illustrative and assume the estate has already used its available thresholds. Verified 24 September 2026.
The Pension Change Arriving In April 2027
For deaths on or after 6 April 2027, most unused pension funds and pension death benefits will be brought into the estate for Inheritance Tax. The policy paper confirms the measure applies whether or not scheme administrators or trustees have discretion over the payment, which closes the route that made discretionary death benefits effectively exempt.
Some things stay outside it. Death in service benefits payable from a registered pension scheme are excluded, as are dependant’s scheme pensions from a defined benefit arrangement or from a collective money purchase arrangement. The exemption for benefits passing to a surviving spouse or civil partner is maintained. Responsibility also shifts: personal representatives, rather than scheme administrators, will be liable for reporting and paying the tax.
The practical consequence is a change of order. Anyone who assumed the sequence was spend the ISA first and leave the pension untouched may want to revisit that with a qualified adviser, because the pension picture is moving on more than one front. The State Pension is separately approaching the frozen personal allowance.
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Where The ISA Inheritance Tax Rules Are Genuinely Unclear
Three ISA inheritance tax questions come up repeatedly, and the official guidance does not fully resolve any of them.
Which APS valuation your provider will use. HMRC permits the higher of the two valuations, but the guidance describes what is allowed rather than what a provider must offer. Some apply the higher figure automatically; others default to the date of death value unless asked. Ask in writing, and keep the reply.
Whether the investments can move without being sold. GOV.UK states that a provider can transfer the investments themselves to a surviving spouse’s ISA “only if they have the same ISA provider as you”. Where the survivor uses a different platform, the outcome is often a sale and a repurchase, with time out of the market in between. Our guide to ISA transfer rules covers the mechanics.
What happens when probate runs long. The three year limit is fixed. Where an estate is complex or contested, the ISA shelter can end while the estate is still being administered, and returns after that point become taxable in the ordinary way. There is no provision in the regulations to extend it.
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Frequently Asked Questions
Key Takeaways
An ISA is not an inheritance tax shelter
It protects you from Income Tax and Capital Gains Tax while you hold it. The ISA inheritance tax rule is that it is assessed like any other asset you own.
A spouse or civil partner inherits it free of tax
The exemption applies to the money. The wrapper itself closes, so the additional permitted subscription is the thing that rebuilds it.
The additional permitted subscription expires
Three years from death for cash, or 180 days after administration completes if that is later. Claim it in time or lose it entirely.
Thresholds are frozen until April 2031
The nil rate band stays at 325,000 pounds and the residence nil rate band at 175,000 pounds, so more estates drift into range each year.
April 2027 changes the wider picture
Most unused pension funds join the estate for Inheritance Tax, which changes the order in which many people planned to spend their money.
Sources: GOV.UK, Individual Savings Accounts: if you die; GOV.UK, How Inheritance Tax works; GOV.UK, Inheritance Tax residence nil rate band; The Individual Savings Account Regulations 1998, regulation 2G; GOV.UK, Manage additional permitted subscriptions into an ISA; GOV.UK, Inheritance Tax on unused pension funds and death benefits; GOV.UK, Summary of reforms to agricultural property relief and business property relief; House of Commons Library, Inheritance Tax: a basic guide. All verified 24 September 2026.
The information provided on this page and throughout the website is for general information purposes only and does not constitute financial advice. It is important that you conduct your own research and consider your own personal circumstances before making any investment decisions.
