The rules on inheriting ISAs

If your spouse or civil partner dies, in most cases you’ll be able to inherit their ISA savings through an Additional Permitted Subscription (APS), also known as an inherited ISA allowance. Any ISA funds transferred as an APS keep their tax-free status and count as a one-off ISA allowance that's granted to the surviving spouse or civil partner for that tax year only.

For example, if your partner had £50,000 in ISA savings, your ISA allowance for the year would be £70,000 (the value of your partner's savings and your own ISA allowance for the current tax year, which currently stands at £20,000).

What’s more, if the deceased leaves the money in the ISA to someone else, the surviving partner is still entitled to an increased allowance for that tax year that’s equivalent to the value of the ISA assets.

The rules mean that the tax-efficiency of the deceased’s ISA won’t be lost, and that the bereaved will be able to enjoy the tax advantages they previously shared with their partner.

To make use of the APS for ISAs, the spouse or civil partner must have been living with the deceased. If the couple are separated, whether by court order, deed of separation or where the marriage or partnership has completely broken down, then the APS does not apply.

If the spouse or civil partner of the deceased is 16 or 17 years old, the APS must be made into an ‘adult’ ISA product and cannot be made into a Junior ISA product.

An inherited ISA allowance can be made into a cash ISA, stocks and shares ISA or an innovative finance ISA (IFISA) – this form of ISA allows the holder to make investments via peer-to-peer lending in a tax-free wrapper.

Lifetime ISAs have a different rule. If you inherit a Lifetime ISA and want to transfer this to another Lifetime ISA, you can only transfer up to the maximum limit of £4,000 in a single tax-year under APS rules. Any excess can be transferred to other types of ISAs and retain its tax-free status.

An inherited ISA covers both when your spouse or partner have specifically left you an ISA in their will, and when you’ve inherited it by being their next of kin. You’ll need to contact the ISA provider and inform them that the account holder is deceased, and that you want to claim this ISA.

Before you can claim an APS, you’ll need to provide the ISA provider with:

• The deceased’s full name
• Their permanent residential address at the date of death
• The deceased’s date of birth and date of death
• Their National Insurance number (if known)
• The date that your marriage or civil partnership took place
• The identity of the account provider who managed the deceased’s ISA.

You’ll also be required to declare that you are the surviving spouse or partner of the deceased, and that you were living with them at the time of their death.

You must apply for an APS within certain time limits. These are:

• Within 180 days of beneficial ownership passing to the surviving spouse or civil partner for ‘in specie’ transfers
• Within three years of the date of death for cash subscriptions
• If later than three years, within 180 days of the completion of the administration of the estate.

Claiming an additional permitted subscription while inheriting an ISA can be a complex process. You may want to engage the services of a qualified financial adviser with a proven track record in dealing with this kind of product to help you make the right decisions.