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ISAs lose tax-free status immediately. Surviving spouses/civil partners can claim Additional Permitted Subscription (APS)—extra ISA allowance equal to deceased's ISA value. Executor contacts investment providers with death certificate, requests valuations, then transfers or sells holdings after probate. Stocks/shares valued at date of death for probate.
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ISAs (Individual Savings Accounts) are tax-free during the account holder's lifetime, but they lose this privileged status immediately upon death. Here's exactly what happens:
| What Happens | Details | Who It Affects |
|---|---|---|
| Tax-free status ends | From date of death, interest/dividends/gains become taxable | Estate and beneficiaries |
| Account remains open temporarily | ISA can stay open during probate administration (executor decides when to close) | Executor |
| Value continues to fluctuate | Stocks & shares ISAs keep growing/falling; cash ISAs keep earning interest | Estate and beneficiaries |
| Spouse gets APS allowance | Surviving spouse/civil partner gets Additional Permitted Subscription (extra ISA allowance) | Spouse/civil partner only |
| Non-spouse inherits value only | Children and other beneficiaries receive cash/investments but cannot maintain ISA status | Other beneficiaries |
| Forms part of estate for IHT | Full ISA value at death included in estate for Inheritance Tax calculation | Estate (IHT may apply) |
Important: The ISA doesn't automatically close on death. The executor can choose to leave it open during probate administration, which may be beneficial if it contains investments you don't want to sell immediately. However, any growth from the date of death onwards is taxable.
For surviving spouses and civil partners, there's significant relief available through the Additional Permitted Subscription (APS) system, explained in detail below.
If you're the surviving spouse or civil partner of someone who died with ISAs, you're entitled to an Additional Permitted Subscription (APS) - an extra ISA contribution allowance on top of your normal annual allowance (currently £20,000 per year).
Critical: Don't Miss the Deadline
You have the LATER of: (1) 3 years from date of death, OR (2) 180 days from grant of probate. If probate takes 18 months, you have 180 days from probate grant, not just 18 months left from the 3-year deadline. Don't assume you have the full 3 years - claim as soon as possible.
Common question: "What if I don't have enough cash to use the full APS allowance?" You don't have to use all of it - contribute what you can afford. Many surviving spouses use inheritance money (from the estate) to fund their APS contributions, effectively maintaining the ISA tax shelter on the inherited wealth.
All stocks and shares owned by the deceased must be valued at the date of death for the probate application and Inheritance Tax return. This valuation is critical - it determines the IHT liability and becomes the base cost for future Capital Gains Tax calculations.
Use HMRC's "quarter-up" rule:
Where to find prices: London Stock Exchange website (historical prices), financial sites like Yahoo Finance, or request from investment platform (£50-150 probate valuation service)
Use the bid price (selling price) on date of death:
Much more complex - requires professional valuation:
Value in foreign currency, then convert to GBP:
Tip: If the deceased held investments through an online platform (Hargreaves Lansdown, AJ Bell, Vanguard, etc.), most offer a probate valuation service for £50-150 which provides accurate valuations for all holdings in a format suitable for the probate application. This can save significant time and ensure accuracy.
Once you have probate, you must decide whether to transfer (re-register) the shares to beneficiaries or sell them and distribute cash. Both approaches have advantages and tax implications.
| Option | Advantages | Disadvantages | Best For |
|---|---|---|---|
| Transfer (re-register) to beneficiaries | • No immediate CGT • Beneficiaries keep investments • Base cost = probate value • No selling in poor market | • Transfer fees (£10-50/holding) • Beneficiaries need accounts • Complex with multiple beneficiaries • Beneficiaries responsible for CGT later | • Single beneficiary who wants shares • Large, diversified portfolio • Poor market conditions for selling |
| Sell and distribute cash | • Simple and clean • Easy to split between beneficiaries • Immediate liquidity • No ongoing investment management | • May trigger CGT if risen • Dealing charges apply • Beneficiaries don't get shares • May sell at bad time | • Multiple beneficiaries • Small holdings (under £10K each) • Beneficiaries want cash • Estate needs closing quickly |
Transfer if:
Sell if:
Mix approach: You can transfer some holdings and sell others. For example, transfer high-quality funds to interested beneficiaries and sell small, obscure holdings to simplify distribution.
Understanding the tax treatment of inherited shares and funds is critical for making informed decisions about whether to sell or transfer, and ensuring beneficiaries understand their tax obligations.
Example
Deceased bought shares for £5,000. Value at death: £10,000. Beneficiary sells at £15,000.
Warning: Market Timing Risk
If you delay selling to "wait for the market to recover," you're taking investment risk on behalf of beneficiaries. Markets can fall further. Unless will specifically gives you discretion to manage investments, it's usually safer to sell reasonably promptly and let beneficiaries reinvest if they wish. Beneficiaries can sue executors for losses caused by unnecessary delay.
Reality: ISAs lose tax-free status on death. Spouse gets APS allowance (extra contribution allowance) but doesn't automatically inherit the ISA wrapper. Must claim APS and contribute own funds.
Solution: Claim APS as soon as possible after death - don't wait until near the 3-year deadline. Some providers take weeks to process applications.
Solution: Use HMRC's quarter-up rule for listed shares, not just closing price. Get professional valuation for unlisted shares. Incorrect valuations cause problems with HMRC.
Solution: Estate has £3,000 CGT allowance per tax year. If selling large portfolio that's risen, consider timing sales across tax years to use multiple allowances.
Solution: Always provide beneficiary with probate value (base cost) for each holding transferred. They need this for CGT when they eventually sell.
Solution: ISA can stay open during probate. Don't rush to close it, especially if it contains investments you want to keep or market conditions are poor. Growth is taxable but better than forced sale at bad price.
Solution: Dividends received after death are taxable income of estate. Track all dividend payments and include in estate's tax return. Failure to report is tax evasion.
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