Money saving expert Martin Lewis has provided vital clarity on the rules surrounding the inheritance of Individual Savings Accounts (ISAs), highlighting a significant tax protection for married couples and civil partners.
The Spousal ISA Allowance Boost
In a recent explanation, Lewis confirmed that when a person dies, they can effectively pass on both their ISA savings and their allowance to their legally recognised spouse or civil partner. The surviving partner receives what is known as an "additional permitted allowance".
This allowance is equal to the total value of the deceased partner's ISA holdings at the date of their death. Crucially, this mechanism allows the inherited savings to retain their tax-free status within the survivor's own ISA, preventing an unexpected income tax bill.
Critical Warnings on Inheritance Tax
However, Martin Lewis issued a stark warning that is often misunderstood. While the money stays safe from income tax, the full value of an ISA forms part of a person's estate for Inheritance Tax (IHT) purposes.
IHT is typically charged at 40% on the value of an estate above the available threshold. Lewis reminded listeners that each individual has a standard IHT nil-rate band of £325,000. An additional £175,000 residence nil-rate band may apply if the main home is left to direct descendants.
Importantly, any unused portions of these allowances can be transferred to a surviving spouse or civil partner. By combining their respective allowances, a couple could potentially shield a combined estate worth up to £1 million from Inheritance Tax.
The Risk of Leaving an ISA to Others
The rules change dramatically if an ISA is left to anyone other than a spouse or civil partner. Lewis stressed that in such cases, the tax-free wrapper is lost.
Once the probate process is complete, the ISA account is frozen and the assets lose their privileged ISA status. The beneficiary would then be liable to pay income tax on any future interest, dividends, or growth generated by those savings.
Martin Lewis's guidance underscores the importance of financial planning for couples, ensuring that valuable tax protections are not inadvertently lost and that families can maximise the wealth passed on to the next generation.
