How to inherit thousands in Isa savings – without paying any tax

Money may not be the first-thing on your mind when a loved one dies, but there is an important allowance that ensures their hard-earned Isa savings don’t go to waste – as long as you can find somewhere to put it.

Before 2015, Isa money lost its tax-free status when someone died, meaning it formed part of their assets, and inheritance tax could therefore be charged if the total value of their estate was above the tax-free nil-rate band allowance (currently £325,000).

Nowadays, the catchily-named “additional permitted subscriptions” (APS) allowance lets a spouse or civil partner effectively inherit their loved one’s Isa by temporarily boosting their own allowance – a move that can potentially save thousands in tax.

However, the APS rules can be tricky and there are time limits for when it can be used. Here, Telegraph Money explains how the APS works, and why you might struggle to find a provider that offers an inheritance Isa.

How does an APS Isa work?

In order to use an ‘additional permitted subscription’, the deceased’s money must be moved to a specialist APS Isa, more commonly known as an inheritance Isa. 

This product essentially gives the surviving husband, wife or civil partner an extra Isa allowance equivalent to the value of the deceased’s savings. 

This protects their loved one’s tax-free cash from inheritance tax (thanks to the spousal exemption), while taking the surviving spouse out of the scope of income tax or capital gains tax they could have to pay on returns if the money was outside of the Isa “wrapper”.

For example, if your spouse passed away and had an Isa worth £50,000, you will get an Isa allowance worth the same amount using the APS.

This is in addition to your own £20,000 annual allowance, effectively giving you £70,000 that can be put into an Isa in that tax year.

You can only move the money into an APS Isa once – but if your partner had multiple Isas then you will get an allowance for each one.

The APS can be used for a cash, stocks and shares, innovative finance or lifetime Isas, or a combination of all of them.

Using the APS to transfer money into a lifetime Isa comes with some extra restrictions; you must meet the age criteria of being between 18 and 39, must keep to the £4,000 annual limit and can’t have already paid into one in the same tax year.

There are a few hoops to jump through, not helped by claimants already dealing with the loss of a loved one often left upset by poorly trained staff with little knowledge about the process.

“It is a lucky dip based on the provider and often individuals working for them,” said Tahina Akther, co-founder of Wildcat Law.

“The ideal would be to go to lawyers who understand the process and can take the admin problems away, however not everyone can afford this.”

Few providers accept APS transfers

Only a fifth of cash Isas currently accept APS transfers.

Moneyfacts data provided to The Telegraph shows that of 510 cash Isa options across the whole market at the start of June, just 107 allowed APS transfers.

Just 52 variable cash Isas out of 216 currently allow APS transfers, rising to 55 out of 294 for fixed rate products.

What’s more, some providers that do accept the transfer will only do so if the deceased person was already a customer.

For example, Coventry Building Society’s Additional Allowance Isa has a variable rate of 2.55pc as of June 2023, but only if the deceased was previously a customer.

Skipton Building Society’s Legacy Cash Isa currently has a rate of 3.5pc with no restrictions.

That compares with best buy rates of around 3.6pc among mainstream Isas, according to Moneyfacts.

If you want to move a stocks and shares Isa, the invested money can usually only be transferred to an account in your name on the same platform.

Investment platforms such as Hargreaves Lansdown and AJ Bell may accept cash APS transfers to and from other providers.

Once the money is moved, it is treated like previous year’s subscriptions so can then be transferred elsewhere.

“It is a minefield for beneficiaries, due to the complex language used,” says Petronella West, chief executive of financial planning firm Investment Quorum.

“Losing a loved one is already traumatic enough and beneficiaries need more help and support during this time.

“Speak to big organisations’ dedicated bereavement teams, as they will have the right knowledge and expertise to guide you through the process. Call centres often don’t have the necessary knowledge to assist you.”

Step by step: how to move the money

Once you’ve found an account that will accept an APS transfer, you need to contact the Isa provider and fill in an application.

You will need to complete and provide details such as your and your spouse’s names, address and dates of birth, when your marriage or civil partnership took place and when they died.

Documents such as your marriage certificate and your spouse’s death certificate may also be required as evidence.

If you are transferring to a new provider, it will contact the old one for you.

Note there are time limits you’ll need to stick to.

You need to apply for the APS within three years of the date of death for cash subscriptions and within 180 days for stocks and shares Isas.

There is also an option to apply within 180 days of the completion of the administration of the estate if you exceed the three-year period.

The money retains its tax-free status during this period and will still benefit from interest on cash and investment growth on stocks and shares, known as a ‘continuing Isa.’ 

The surviving spouse can choose to use the value at the date of death or when the account is closed.