The question of whether ISAs can be protected from inheritance tax (IHT) is a natural one for many ISA customers. With pension pots, currently exempt from IHT, set to become liable for the tax from April 2027, it’s more important than ever to explore ways to shield your ISA savings from the taxman. While there is no special exemption for ISAs from IHT, there are a few strategies that can help you reduce or avoid a potential inheritance tax bill.
- Passing your ISA to your spouse or civil partner
- Gifting money to loved ones before you die
- Considering alternative investments, such as AIM shares
- Working out whether your ISA would be liable for IHT
Let’s take a closer look at each of these strategies in more detail.
Passing Your ISA to Your Spouse or Civil Partner
If you have a spouse or civil partner, the best way to avoid IHT on your ISA is to leave it to them when you die. This is because ISAs are subject to IHT unless they are left to your spouse or civil partner, and there is no IHT payable when assets are passed to them upon your death.
Shaun Moore, tax and financial planning expert at Quilter, explains: “ISAs are subject to inheritance tax unless they are left to your spouse or civil partner, as there is no IHT payable when assets are passed to them upon your death. In this instance, the money will also be able to retain its ISA status and your spouse or civil partner will be able to continue benefitting from the tax-free gains and income that may be accrued.”
Moore notes that your spouse or civil partner can also continue to contribute to their own ISA allowance, which is currently £20,000 per tax year. This means that they can continue to benefit from the tax-free gains and income that may be accrued, as long as they leave the ISA to them when you die.
Working Out Whether Your ISA Would Be Liible for IHT
It’s a good idea to work out whether your ISA would actually be liable for IHT, because you may find that your money and possessions won’t be subject to the tax. Only about 5% of the richest families have to pay IHT.
Moore notes that everyone gets a “nil-rate band”, which is a buffer before IHT kicks in. Individuals can usually pass on £325,000 to beneficiaries without IHT applying. There is also a £175,000 residence nil-rate band for those who leave a main home to a “direct descendent” like a child or grandchild. So, a total of £500,000 can be left tax-free for some people.
Moyes adds: “As such, you should determine how much your estate is worth and therefore how much may be liable to IHT before worrying about shielding your ISA savings from the tax. In addition, if your spouse or civil partner passes away before you, the amount you can pass on IHT free could be as much as £1 million as any of their unused nil-rate band can be transferred to you.”
Gifting Money to Loved Ones Before You Die
If you’re concerned there may be IHT payable on your ISAs, there are a few things you could consider. One strategy is to gift money to loved ones before you die. This can help reduce the value of your estate and subsequently any IHT bill.
Moore notes: “This would not only provide them with financial support which you could see them enjoy, but it can also help to reduce the value of your estate and subsequently any IHT bill. You can gift up to £3,000 a year IHT free, or you can gift as much as you wish but it will only be deemed outside of your estate for IHT purposes if you survive for seven years following the gift.”
Moyes adds: “You can also make gifts from surplus income. You must be able to show that this is income and not capital, so you could give away interest earned on a cash ISA or dividends or profits from a stocks and shares ISA. These gifts must be “regular”, and cannot affect your standard of living.”
Moore notes that a junior ISA can be a handy place to deposit a gift for a youngster under 18. He explains: “The junior ISA allowance is very generous and means you can contribute up to £9,000 per child each year. If you have grandchildren, you may wish to consider funding JISAs for them with regular gifting.”
Considering Alternative Investments, Such as AIM Shares
Investing in qualifying AIM shares is IHT-free, and has been a useful way for investors to reduce their tax liability in the past. However, the tax relief will halve from 100% to 50% from April 2026, meaning qualifying AIM shares will be liable for 20% inheritance tax – up from zero, but still half of the full 40% IHT rate.
Moyes notes that the tax relief is still there (albeit at a lower rate) as the government is keen to support the funding of small and medium sized enterprises in the UK. He comments: “We often see retirees that have built up a significant ISA portfolio and have other assets that put them beyond the inheritance tax threshold looking at AIM ISAs. By investing in AIM, retirees can reduce their inheritance tax bill, while still having access to the money should they need it later in retirement.”
However, note that AIM shares are risky and best-suited for experienced investors. Moore cautions: “Ultimately, you could lose more money than it would cost to pay any IHT bill if the investments did not pan out in the way you hoped.”
If you are interested in using AIM to cut your IHT bill, you can either choose your own AIM shares to invest in or select a professionally managed portfolio. Wealth Club offers a range of AIM IHT ISAs.