Individual Savings Accounts (ISAs) are a popular way for people in the UK to save or invest their money tax-efficiently. While ISAs offer several benefits, one question that often comes up is how they are taxed upon death. Specifically, how much is inheritance tax on an ISA?
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How much is inheritance tax on a ISA?
Firstly, it's important to understand what inheritance tax is. Inheritance tax is a tax that is paid on the value of an individual's estate when they die. The estate includes everything the person owned, including property, money, and possessions. Inheritance tax is calculated at 40% on the portion of the estate that exceeds the nil-rate band, which is currently set at £325,000.
ISAs are generally considered to be tax-efficient because they are exempt from income tax and capital gains tax. This means that any interest or growth earned on an ISA is not subject to tax. However, when it comes to inheritance tax, the rules are a bit more complicated.
When an individual dies, their ISA will form part of their estate for inheritance tax purposes. This means that if the value of the estate (including the ISA) is above the current inheritance tax threshold of £325,000, inheritance tax will be payable on the portion of the estate that exceeds the threshold.
However, there is one important exception to this rule: the spouse or civil partner exemption. If an individual's ISA is passed on to their spouse or civil partner upon death, it will be exempt from inheritance tax. This means that the ISA can be inherited by the spouse or civil partner without any tax implications.
Additionally, there is also a new rule known as the residence nil-rate band, which was introduced in April 2017. This rule provides an additional inheritance tax allowance for people who pass on their home to their children or grandchildren. The allowance is currently set at £175,000 and will increase each year in line with inflation.
So, let's look at an example. Let's say that an individual has an ISA worth £100,000, and their estate (including the ISA) is worth £500,000. Upon death, their estate would be subject to inheritance tax as it exceeds the current threshold of £325,000. The inheritance tax due would be 40% on the portion of the estate that exceeds the threshold, which in this case is £175,000. Therefore, the inheritance tax due would be £70,000 (40% of £175,000).
However, if the individual had passed their ISA on to their spouse or civil partner upon death, it would be exempt from inheritance tax. In this case, the ISA would not be subject to inheritance tax, and the spouse or civil partner would be able to inherit the ISA without any tax implications.
In summary, while ISAs are generally considered to be tax-efficient, they can still be subject to inheritance tax upon death. If the value of the estate (including the ISA) is above the current inheritance tax threshold, inheritance tax will be payable on the portion of the estate that exceeds the threshold.
However, the spouse or civil partner exemption can provide a valuable exception to this rule, allowing the ISA to be inherited tax-free. It's also worth noting that the new residence nil-rate band can provide an additional inheritance tax allowance for people who pass on their home to their children or grandchildren.
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