Many people believe that an ISA is free of all taxes but unfortunately your estate may still pay Inheritance Tax on ISAs when you die. 

Along with pensions, ISAs can play a fundamental part of producing a sustainable income in retirement. 

But unlike pensions, the more money you have in ISAs unchecked can mean more money due to HM Revenue and Customs by way of Inheritance Tax 

Nearly 50% of your ISA could be lost to Inheritance Tax on your death if the right planning is not put in place. 


Be mindful of Inheritance Tax on ISAs  


It is still absolutely right to be saving and investing into ISAs whilst you are accumulating. You don’t pay any Income Tax on interest and dividends produced by ISAs and no Capital Gains Tax on the gains you make from your investments inside an ISA.  

When you decide to withdraw money from an ISA, perhaps to supplement your pension income in retirement, withdrawals from ISAs are tax free.  

By using ISAs to fund part of your retirement income you could be boosting your income by 20% or even 40% by not having to pay Income Tax on the withdrawals.  

So far so good.  

But if you are married and/or have children it may be your desire to leave as much as possible to your loved ones once you are gone.  

After all, you haven’t worked hard, saving and investing all your life just to give away a good chunk to the tax office! 

For someone that started using their stocks and shares ISA allowance from when ISAs were launched in 1999, if they had continued investing the allowance every year they could have accumulated £246,560 in ISAs by the end of this tax year (2020/21). That’s before any investment growth.  

If this person was married or had a partner then between them they could have accumulated £493,120 in ISAs before any growth was factored in. If their estate was liable to Inheritance Tax then their children could find that £197,248 (£493,120 x 40%) of the combined ISAs is lost. Most likely much more if the ISAs had grown in value through good investment performance. 


How to remove the prospect of Inheritance Tax on ISAs 


When it comes to trying to avoid Inheritance Tax on ISAs one option you have is to gift the money you have in ISAs to your children or other beneficiaries whilst you are still alive.  

This removes the money from your estate and therefore wouldn’t be included in the calculations for Inheritance Tax.  


  • You would need to survive 7 years from making the gift for it to fully fall outside of your estate. If you died within 7 years then all or part of the gift would be bought back into your estate. 
  • You lose access and control of the ISA. This might not be appropriate if you rely on them to provide you with an income in retirement. Or you don’t fully trust your children with the money at this time! 
  • The money would need to be removed from the ISA when gifted and therefore your beneficiary may need to spend some years using their ISA allowances to get it all back into an ISA, paying Income Tax and Capital Gains Tax on the money in the meantime.

An alternative planning idea is to keep the ISAs but change the underlying investment strategy.  

If you chose an investment or investments that qualify for Business Property Relief (BPR) then these investments are not subject to Inheritance Tax providing the portfolio has been held for 2 years and at the point you die.  

BPR-qualifying ISAs invest in the shares of companies listed on the Alternative Investment Market (AIM). They are higher risk than traditional investments on the main market and therefore the Inheritance Tax relief is designed to provide some compensation to investors for taking the additional risk. 

Working with an expert in this field can also ensure you limit your risk by investing in a diversified portfolio of AIM listed companies.  

The beauty of this Inheritance Tax planning idea is: 

  • You retain access and control over your ISAs. 
  • You can continue to receive an income from them. 

With this approach you don’t need to invest all your ISAs into this type of investment. You could split your ISA and allocate some to protect against Inheritance Tax.  

Another good tip is to utilise this planning on first death. For a married couple, on first death the survivor is entitled to move their spouses ISA into an ISA for themselves, retaining the ISA tax allowances. Why not use the spouses ISA at this point to plan for Inheritance Tax and use an AIM portfolio.  

One of our specialisms here at RTS Financial Planning is estate planning including the protection of your wealth and ensuring as much is passed to your family as tax efficiently as possible. If you would like to understand your current Inheritance Tax position then we are currently offering a free Inheritance Tax assessment. Using our Inheritance Tax calculator we will provide you with a report outlining your current liability (if any). If you would like to understand more then please get in touch for a free 15-minute consultation or book an appointment

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.