How ISAs can help with inheritance tax planning

Understand the rules around ISAs for tax-efficient estate planning

This material provides an overview of the rules as we understand them at the time of writing, and they may change. This material is provided for information purposes only and doesn’t constitute legal or financial advice – if you’re unsure about what you need to do, you should speak to a legal or financial adviser.

Of all the life admin we deal with, planning for when we’re no longer here isn’t the most appealing task. But we all want peace of mind that our loved ones will be OK when we’re gone. So it pays to do a bit of preparation now, to benefit them in the long term.

Take inheritance tax, currently applied to estates worth over £325,000. In the 2019/20 tax year there were 23,000 deaths that resulted in an IHT charge [1]Footnote 1. How much inheritance tax your family might pay on your estate – that’s the total worth of your money, property, and possessions – is something you can prepare for.

Bear in mind that tax rules are subject to change and depend on individual circumstances and, of course, it’s important we all pay our share.

Additional Permitted Subscriptions for your spouse or civil partner

You can put up to £20,000 into an ISA every year and pay no income or capital gains tax on your savings, so it’s well worth making the most of while you’re alive. You can read more about how ISAs work here.

ISAs come in handy once you die, too, because your spouse or civil partner will effectively inherit a whole new ISA allowance. This extra allowance is equivalent to the value of your ISA when you die, known as Additional Permitted Subscription (APS) and, as the name suggests, it’s in addition to your spouse/civil partner’s annual ISA allowance. So, if you die with £50,000 in your ISA, your spouse/civil partner will get an allowance of £70,000 for the tax year (£50,000 APS plus their own £20,000 annual ISA allowance).

Put your gift allowance into ISAs

Everyone gets a tax-free gift allowance of £3,000 each tax year. That means you can give away £3,000 without it counting towards your estate for inheritance tax purposes.

You can gift that money however you like, including a Junior ISA if the gift is for your children or grandchildren. If your loved ones are adults, you could gift the money for them to pay into their own ISA. If you do that, your loved ones will get to grow their savings in a tax-efficient way while you’re still alive. 

If you’re not feeling particularly flush one year, you’re able to carry forward any unused gift allowance into the next tax year. So, there’s the potential to gift £6,000 tax-free in any given year. Bear in mind, though, that you can’t carry the allowance over again. 

Interested in opening an ISA? See if the Aviva Stocks and Shares ISA has what you’re looking for. Remember that, as with all investments, the value of your ISA can go down as well as up and you may get back less than you paid in.

Where do I start?

Let us show you more about our Stocks & Shares ISA, Wealthify's ISA and the Junior ISA.

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