Do ISAs Count for Inheritance Tax? What Your Family Actually Pays

Are ISAs Subject to Inheritance Tax?

Yes — the full value of your ISAs counts towards your estate for inheritance tax (IHT) when you die. The ISA wrapper protects you from income tax on interest and dividends and from capital gains tax on growth while you’re alive. It has never offered any protection from IHT.

IHT is charged at 40% on the part of your estate above your available allowances (2025/26, frozen until April 2031):

• Nil-rate band: £325,000 per person.
• Residence nil-rate band: up to £175,000 extra if your home (or its proceeds) goes to children, grandchildren or other direct descendants. It tapers away by £1 for every £2 your estate exceeds £2 million.
• Charity rate: the rate drops to 36% if you leave at least 10% of your net estate to charity.

Your ISA is simply added to everything else — your home, cash, General Investment Account, and (from April 2027) most unused pensions. HMRC’s overview is at gov.uk/inheritance-tax.

How Much Inheritance Tax Would Your Family Pay?

It depends far more on who inherits and what else you own than on the ISA itself. These simplified examples use 2025/26 allowances:

The pattern is clear: an ISA rarely creates an IHT bill on its own, but for single people and surviving spouses with a paid-off home, a well-funded ISA is often what pushes the estate over the line.

Can You Leave an ISA to Your Spouse Tax-Free?

Yes — ISAs left to a spouse or civil partner are exempt from IHT, and the survivor can keep the money inside an ISA wrapper. Three rules work together:

• Spouse exemption: transfers between spouses or civil partners on death are normally IHT-free, with no upper limit (limits can apply if one of you is not long-term UK resident).
• Additional Permitted Subscription (APS): the survivor gets an extra ISA allowance equal to the deceased’s ISA value, on top of their own £20,000 — see our APS guide.
• Transferable nil-rate bands: any unused nil-rate band and residence nil-rate band pass to the survivor, so a couple can have up to £1 million of allowances on the second death.

The catch is that this only defers the bill. Everything ends up in the survivor’s estate, and the IHT question comes back on the second death. Unmarried partners get none of these rules — for long-term cohabiting FIRE couples, that alone can be a five- or six-figure difference.

Do AIM ISAs Avoid Inheritance Tax?

Only partly, and less than they used to. Shares in qualifying companies on the Alternative Investment Market (AIM), held for at least two years, attract Business Relief. Until April 2026 that was 100% relief. Since 6 April 2026, AIM shares get 50% relief, which means an effective IHT rate of 20% rather than 40%.

In the table above, that saves £60,000 on a £300,000 AIM ISA. But the risk is real: AIM companies are small, less liquid and historically volatile. A 30% fall in the portfolio would lose £90,000 — more than the tax saved. AIM ISAs also tend to carry higher fees than a global tracker, and not every AIM share qualifies.

For most FIRE savers in their 30s and 40s, an AIM ISA makes little sense — you need the money to fund decades of retirement, not to be optimised for a death that may be 50 years away. They are a later-life tool, best discussed with an adviser.

How Can You Reduce Inheritance Tax on ISAs?

The main levers are spending, gifting, choosing the right beneficiaries, and thinking about which pot you draw first. None of them involve the ISA wrapper itself, because an ISA can never be transferred to another person while you’re alive.

1. Gift withdrawals. Taking money out of your ISA and giving it away is a potentially exempt transfer — outside your estate if you survive seven years. Your recipients can reinvest using their own £20,000 ISA allowance (or a Junior ISA for children, up to £9,000 a year).
2. Use the immediate exemptions. £3,000 a year (plus last year’s if unused), £250 small gifts per person, and wedding gifts of up to £5,000 to a child are exempt straight away.
3. Gifts out of surplus income. Regular gifts from income you don’t need are exempt with no seven-year wait. Interest and dividends earned inside an ISA can count as income for this; withdrawing ISA capital doesn’t. Keep records.
4. Leave the residence nil-rate band room to work. It only applies if your home goes to direct descendants — a will that leaves everything to a trust or to nieces and nephews can lose £175,000 of allowance.
5. Revisit your drawdown order. The classic advice was to spend ISAs first and leave pensions untouched, because pensions sat outside the estate. From April 2027 most unused pensions will count for IHT too — read our pension inheritance tax guide. Inherited ISAs carry no income tax for heirs, whereas inherited pensions can also be taxed as income if you die after 75, so the order now deserves a fresh look.

And don’t forget the obvious one: spending it. Plenty of FIRE savers reach their number and keep saving out of habit. Die With Zero thinking — using your money while you can enjoy it — is also an IHT strategy.

What Happens to the ISA After You Die?

It becomes a “continuing account of a deceased investor” and stays free of income tax and CGT for up to three years while the estate is sorted out. IHT is still calculated on its value at the date of death, and is normally due by the end of the sixth month after the month of death. Executors can often use ISA cash, or money released directly to HMRC by banks and building societies, to pay it. For the full process, see what happens to your ISA when you die.

Frequently Asked Questions

Work Out Your Own Numbers

Before worrying about IHT, check how big your ISA is likely to get — and how much you actually need to spend:

• ISA Millionaire Calculator — project your ISA’s value and see whether it could push your estate over the nil-rate bands
• FIRE Number Calculator — work out what you need to fund retirement, so you know what’s genuinely surplus and could be gifted

Remember the State Pension (£11,502 a year in 2025/26 from 67) reduces how much your ISA needs to cover later in life — check your forecast at gov.uk/state-pension.