ISA Inheritance: Rules For Spouses
- Atlas Tax
- May 15
- 17 min read
Updated: May 18
ISA Inheritance: Rules for Spouses in the UK: What You Really Need to Know in 2026
Let's be honest, nobody wants to spend a Sunday afternoon thinking about what happens to their ISA when they die. But here is the uncomfortable truth I've seen play out in my practice time and again: families who haven't understood these rules have lost thousands of pounds in avoidable tax. Not because they did anything wrong, but simply because nobody explained the detail clearly enough.
And the detail does matter here. The rules around ISA inheritance for spouses and civil partners are genuinely more generous than most people realise, but they come with conditions, deadlines, and procedural steps that are easily missed, especially when a family is already in the middle of grieving and administering an estate.
So, let's walk through exactly how this works in 2025/26, what's changing, and what your family should be doing right now.
The Fundamental Rule Most People Get Wrong
Your spouse doesn't "inherit" your ISA in the way you might think
This is the single biggest misconception I encounter. When a client tells me, "My ISA will just pass to my wife when I die, won't it?", my answer is: yes and no. The money can pass to her, but without proper planning, the tax-free wrapper is effectively lost unless very specific steps are taken.
Anyone can inherit the funds sitting inside an ISA, a spouse, a child, a sibling. But the critical distinction is that only a surviving spouse or civil partner can preserve those funds in a tax-efficient vehicle going forward. Everyone else receives the money as part of the estate, where it becomes potentially subject to inheritance tax, and once distributed, it loses its ISA status entirely.
The ISA doesn't simply transfer, it becomes something else first
When an ISA holder dies on or after 6 April 2018, their ISA does not close immediately. Instead, it enters what HMRC calls a "continuing account of a deceased investor." Think of it like a holding pen. The account stays open, the investments remain tax-free, no income tax, no capital gains tax, but no new money can be paid in. This status continues until whichever of the following happens first: the administration of the estate is complete, the ISA is closed, or three years have passed since the date of death.
This rule, introduced in 2018, was a meaningful improvement on what came before. Before April 2018, the ISA wrapper effectively evaporated on death, and any growth or income arising during the often lengthy probate process became immediately taxable. Now, at least, the clock doesn't start ticking the moment someone passes away.
The Additional Permitted Subscription: Your Spouse's Most Powerful Tool
What it is and where it came from
The Additional Permitted Subscription,or APS, is the mechanism through which a surviving spouse or civil partner can effectively "inherit" the tax-free status of the deceased's ISA savings. It was introduced following the Autumn Statement in December 2014 and has applied to deaths on or after 3 December 2014.
In plain terms: the APS gives the surviving spouse an additional one-off ISA allowance, on top of their own standard annual allowance of £20,000, equal to the value of their late partner's ISA. This is not a transfer of the ISA itself, it is an allowance that allows the survivor to subscribe additional sums into their own ISA.
The APS sits completely separate from the annual allowance
Here is something that trips clients up regularly. Suppose your spouse dies leaving ISAs worth £85,000. You still have your own standard £20,000 annual ISA allowance for 2025/26. The APS of £85,000 is entirely separate and does not eat into that allowance. In theory, in the tax year you exercise the APS, you could contribute up to £105,000 into ISAs, your £20,000 annual allowance plus the full £85,000 APS. That is, frankly, an extraordinary opportunity to shelter a substantial sum from future tax.
You don't need to have actually inherited the money
This is the detail that surprises almost everyone. The APS is available regardless of whether the surviving spouse inherits the ISA assets themselves. Let's say your spouse leaves their ISA to your adult children in their will. You, as the surviving partner, are still entitled to claim the APS allowance equal to the value of those ISAs. You can then use your own money,savings, an inheritance from elsewhere, proceeds from a property to fill that allowance.
The allowance is based on the tax-free entitlement your spouse had built up, not on whether you physically received those particular funds.
How the APS Value Is Calculated: The Date of Death vs. The "Higher Value" Rule
Deaths before 6 April 2018, the simpler rule
For those who lost a spouse before 6 April 2018, the APS is fixed at the value of the ISA on the date of death. Simple, clear, and without flexibility. If the ISA was worth £60,000 on the day of death, the APS is £60,000, full stop. Any growth that occurred between death and probate completion was irrelevant to the calculation.
Deaths on or after 6 April 2018, the "higher of" rule
For more recent deaths, the rules are more generous. The APS equals whichever is higher of:
● The value of the ISA at the date of death, or
● The value of the ISA at the point it ceases to be a "continuing ISA" (i.e., when the estate administration concludes, when the ISA is closed, or at the three-year anniversary)
The practical significance of this is substantial. Probate can easily take 12 to 24 months, sometimes longer for complex estates. If the investments held in the ISA grow meaningfully during that period, as stock market investments often do, the surviving spouse's APS reflects that higher, later value. They are not penalised for the time it takes to administer the estate.
Important caveat: This "higher value" benefit disappears if you have already used any part of the APS allowance, or if you transfer the allowance to another provider, before the continuing ISA status ends. Once you act, the clock stops, and the value is fixed at that point. I have seen clients lose out on thousands of pounds simply by being too eager to act before probate was fully complete.
The Time Limit: Don't Miss the Deadline
Three years from death, or 180 days from estate completion
The APS must be used within a specific window. The deadline is the later of:
● Three years from the date of death, or
● 180 days after the completion of administration of the estate
So if your spouse died in January 2023 and probate wasn't completed until February 2026, you would have until August 2026,180 days after estate completion, to use the allowance, even though that is more than three years from the date of death.
This matters because estates involving property, business interests, or overseas assets can take considerable time to wind up. The 180-day extension is a sensible safety valve, and one that many solicitors and financial advisers fail to communicate clearly.
What "using" the APS means in practice
Using the APS involves contacting an ISA provider, either the one who held the deceased's ISA or a new provider of your choosing, and completing an APS eligibility declaration. You then make cash payments or, in some cases, transfer investments in specie (without selling them first) up to the value of the allowance. Payments can be made in instalments; there is no requirement to use the entire APS in one go, provided the total stays within the allowance and the deadline is met.
Practical Complications I've Seen in Real Life
Multiple ISAs, multiple APS allowances
Where a deceased held ISAs with several providers, very common after decades of annual contributions across different banks and investment platforms, the surviving spouse will have a separate APS allowance with each provider. This creates administrative complexity: you need to obtain APS eligibility declarations from each provider, track the allowances separately, and ensure you don't exceed the aggregate total.
The allowance can be consolidated with a single provider of your choice via a transfer process, but only before you have begun using the allowance with the original provider. Once you make a payment into a provider's APS product, that provider holds your allowance and you cannot transfer it elsewhere.
In specie transfers: the 180-day rule for investments
If you wish to transfer the actual investments, shares, funds, bonds from the deceased's ISA directly into your own ISA without selling them, you must complete this within 180 days of becoming the beneficial owner of those assets. This deadline is completely separate from the general APS time limit and is strictly observed. Miss it, and you lose the ability to transfer the assets "wrapped",they would need to be sold first, with the cash then used to fill the APS allowance.
The "living together" requirement
The APS is only available to a spouse or civil partner who was living with the deceased at the date of death. Formal legal separation, or a practical separation that was clearly on the road to becoming permanent, can disqualify a surviving partner. I recall a case, not a client of mine, but one I heard of through professional networks, where a couple had been living apart for two years before one partner's unexpected death. The surviving spouse was not entitled to the APS, despite still being legally married. This is one of those provisions that can be brutally unfair in practice, and it underscores the importance of keeping estate planning current during any marital difficulty.
ISAs and Inheritance Tax: Clearing Up the Confusion
The spousal exemption does the heavy lifting
This is where many people conflate two separate things. The APS is a mechanism to preserve the tax-free income and growth status of ISA savings going forward; it is an income tax and CGT tool. The question of whether ISA savings are subject to inheritance tax is a different matter entirely, governed by completely different rules.
The good news for most married couples is that assets passing between spouses are fully exempt from inheritance tax under the spousal exemption, regardless of how large the estate is, provided both spouses are long-term UK residents (a rule that changed from 6 April 2025; more on this shortly). So in the vast majority of cases, a surviving spouse faces no IHT on their late partner's ISA savings passed to them.
ISAs form part of the estate on the second death
Here is the trap that catches families off guard. While an ISA passed from one spouse to another escapes IHT on the first death (thanks to the spousal exemption), the accumulated ISA savings, potentially now swelled by the APS, sit within the surviving spouse's estate and are fully assessable to IHT on the second death.
With the nil-rate band frozen at £325,000 until at least 2031, and the residence nil-rate band at £175,000 (also frozen), it is alarmingly easy for a surviving spouse with a modest home, pension, and ISA portfolio to find their estate in IHT territory. I have clients with total ISA portfolios well in excess of £200,000, built up over decades of maximum contributions. For someone in that position, the ISA is not a tax-free asset on their death, it is a fully taxable one.
The April 2025 residency change affecting IHT on spousal transfers
From 6 April 2025, the UK shifted from a domicile-based to a residence-based test for inheritance tax. The unlimited spousal exemption, which previously required one spouse to be UK domiciled, now depends on both spouses qualifying as "long-term UK residents," defined as being resident in the UK for at least 10 of the previous 20 tax years.
For most couples who have lived in the UK throughout their adult lives, this makes no practical difference. But for mixed-nationality couples, or those with significant periods of overseas residence, this is a significant change that requires specialist advice. Where one spouse is a long-term UK resident and the other is not, transfers on death between them are capped, the unlimited exemption does not apply, and only the nil-rate band of £325,000 can be transferred free of IHT.
The Horizon: Changes Coming That Every Couple Should Know About
Cash ISA allowance cut from April 2027
From 6 April 2027, adults under the age of 65 will only be able to contribute a maximum of £12,000 per year into cash ISAs, down from £20,000. The overall annual ISA allowance remains at £20,000, but the balance,up to £8,000, must go into a stocks and shares ISA, a Lifetime ISA, or another qualifying ISA type. Savers aged 65 and over are exempt from this restriction and retain the full £20,000 cash ISA limit.
Crucially, this restriction does not appear to apply to APS contributions, which are treated as a separate category of subscription. But providers are still clarifying their systems, and the legislation has not yet been definitively tested on this point. My advice: if you have an APS allowance to use and you want to deploy it into a cash ISA, try to do so before April 2027 to avoid any ambiguity.
For couples in the process of building up their ISA portfolios now, 2025/26 and 2026/27 are the last two full years under the current rules. Making full use of both your allowances in these years is sound financial planning.
Pensions and IHT, why ISAs become more valuable after April 2027
From 6 April 2027, most unused pension funds and lump-sum death benefits will be included in a deceased's estate for IHT purposes. This is a seismic shift. For decades, the strategy for wealth-rich retirees was to spend their ISAs and other savings first, preserving their pension as a largely IHT-free inheritance vehicle. That strategy is being dismantled.
The consequence for ISA planning is indirect but real: as pensions lose their IHT advantage, the ISA, already a tax-free income and CGT vehicle, becomes a more central part of estate planning. The APS, in particular, takes on renewed importance as a mechanism to pass the tax-free ISA wrapper through a marriage without triggering an IHT charge on the first death.
It's also worth noting that pension funds transferred to a spouse or civil partner remain exempt from the new IHT charge, mirroring the existing spousal IHT exemption. The real hit falls on children and other non-spouse beneficiaries, but the cumulative effect of a large pension, a large ISA portfolio, and a family home could still push an estate well into IHT territory on second death.
A Hypothetical Case Study: Margaret and David
Illustrating how the rules work in practice
Margaret, 71, dies in September 2025. She held three ISAs: a cash ISA with her bank worth £28,000, a stocks and shares ISA with an investment platform worth £63,000, and a cash ISA from a previous provider worth £12,000. Total ISA value at date of death: £103,000.
Her husband David, 74, is the sole beneficiary of her estate under her will. David himself holds ISAs worth £87,000. Their home is worth £410,000 and they have modest savings outside the ISA wrappers.
Step 1 — The estate passes free of IHT. Margaret's entire estate passes to David under the spousal exemption. No IHT is payable on first death. Margaret's unused nil-rate band (£325,000) is also transferable to David's estate, giving him a potential combined nil-rate band of £650,000 on his own death, plus the residence nil-rate band.
Step 2 — David's APS. David is entitled to three separate APS allowances: £28,000 with the bank, £63,000 with the investment platform, and £12,000 with the third provider. He can use these with the original providers, or consolidate with a provider of his choice. so long as he has not yet made any APS payment to a given provider.
Step 3 — Using the APS. David decides to consolidate all three allowances with a single stocks and shares ISA provider he already uses. He completes the transfer authority forms with each original provider and receives a combined APS allowance of £103,000 with his chosen provider. During 2025/26, he contributes the full £103,000. funded partly by cash he inherits from Margaret's savings accounts and partly from his own liquid savings. He also pays in his own annual £20,000 allowance. In one tax year, David's ISA portfolio grows from £87,000 to £210,000.
Step 4 — The continuing ISA. While the estate is administered, Margaret's ISAs remain as continuing ISAs, earning tax-free interest and retaining investment growth. If the investments rise during this period, David's APS allowance reflects the higher value when the accounts finally close. He does not rush to use the APS until probate is concluded.
Step 5 — The second death planning. David's combined estate, home, ISAs, pension, and savings, will exceed his combined nil-rate bands on his own death. He begins a programme of regular gifts from surplus income (the "normal expenditure out of income" exemption) and reviews his pension drawdown strategy in light of the April 2027 changes.
A Quick Reference: APS Rules at a Glance
Feature | Detail |
Who qualifies | Surviving spouse or civil partner (must have been living together at death) |
When APS applies | Deaths on or after 3 December 2014 |
APS amount (death before 6 April 2018) | Value of deceased's ISA at date of death |
APS amount (death on or after 6 April 2018) | Higher of: value at death OR value when continuing ISA ends |
Does APS reduce annual allowance? | No — it sits entirely separately |
Must you have inherited the ISA assets? | No — you can use your own money to fill the APS |
Time limit | 3 years from death, OR 180 days from estate completion (whichever is later) |
In specie transfer deadline | 180 days from becoming beneficial owner |
Types of ISA you can use APS in | Cash, Stocks & Shares, Lifetime ISA, Innovative Finance ISA |
Does IHT apply on transfer to spouse? | No — spousal exemption applies (both must be long-term UK residents from April 2025) |
The Mistakes I See Most Often
Waiting too long and losing the "higher value"
Clients sometimes wait, reasonably assuming there is no urgency, and then make a partial APS payment before the estate is complete. The moment that first payment is made, the "higher of" calculation is fixed. If the investments subsequently rise further, they receive no benefit. The rule rewards patience up to the point of action, but punishes premature action.
Failing to claim from multiple providers
Where a deceased held ISAs at several providers, the APS allowance exists separately at each one. I regularly meet recently bereaved clients who knew about the APS but only claimed it from the main provider, unaware that two or three smaller legacy ISAs at other providers carried their own allowances. Those unclaimed allowances expire.
Assuming IHT doesn't apply because it's an ISA
There is a widespread but entirely mistaken belief that ISAs are IHT-exempt. They are not, not on the second death, and not when passing to anyone other than a spouse. A surviving spouse with a large combined ISA portfolio needs to think carefully about whether estate planning measures are appropriate.
Not updating expressions of wish with pension providers
As pension IHT treatment changes from April 2027, expressions of wish, the forms that guide pension trustees on who should receive death benefits, take on fresh importance. A surviving spouse receiving pension death benefits will remain exempt from the new IHT charges. But expressions of wish directing pension funds to adult children will pull those sums into the IHT net from 2027.
Summary of Key Insights
● The APS gives a surviving spouse or civil partner a one-off extra ISA allowance equal to their late partner's ISA value, on top of their own annual £20,000 allowance.
● The APS is available regardless of whether the surviving spouse physically inherits the ISA assets, it can be filled with any money they have available.
● For deaths on or after 6 April 2018, the APS equals the higher of the ISA value at date of death or the value when the continuing ISA closes, a rule that benefits those who wait through a rising market.
● Making any APS payment, or transferring the allowance to a new provider, fixes the value at that point, so do not act before the estate is concluded if you expect the continuing ISA to grow.
● The APS deadline is three years from death or 180 days after estate completion, whichever is later, more generous than most families realise.
● Where a deceased held ISAs with multiple providers, separate APS allowances exist at each provider and must each be claimed individually.
● ISAs are free of income tax and CGT during the holder's lifetime, but they are not exempt from IHT, they form part of the estate on the surviving spouse's second death.
● The spousal IHT exemption that protects ISA transfers on first death now requires both spouses to be long-term UK residents (from 6 April 2025); international couples must take specialist advice.
● From April 2027, the cash ISA contribution limit falls to £12,000 per year for those under 65, making 2025/26 and 2026/27 especially valuable years to maximise contributions under current rules.
● The inclusion of pensions in IHT from April 2027 increases the strategic importance of ISAs as an estate planning vehicle, and makes the APS more valuable than ever as a spousal inheritance tool.
FAQs
Q1: Can a surviving spouse use the Additional Permitted Subscription even if they were living in a care home separately from their partner at the time of death?
A1: Well, it's worth knowing that this particular scenario catches a lot of families off guard, but the answer is reassuring. If one partner was living in a care home at the time of death, HMRC does not treat this as a "separation" for the purposes of the APS eligibility rules. The key test is whether the couple remained legally married or in a civil partnership and had not separated in the legal or practical sense. Temporary separation for care purposes, even if it lasted years, does not disqualify the surviving spouse. I've seen this question arise regularly where a husband or wife spent the final years of their life in residential care while the other remained at home. The APS remains fully available. Always confirm your specific circumstances with the ISA provider and, where necessary, a solicitor.
Q2: What happens to the APS allowance if the surviving spouse dies before using it?
A2: In my experience with clients, this is one of the most emotionally charged planning gaps I encounter, and unfortunately the answer is stark. The APS is personal to the surviving spouse or civil partner. If they die before using it, or before the three-year deadline has passed, the allowance lapses entirely. It cannot be passed on to their own beneficiaries or transferred to anyone else. There is no secondary inheritance of the APS. This means that where a surviving spouse is themselves elderly or seriously ill, there is a strong case for acting promptly to deploy the allowance rather than waiting for the estate to be fully administered. Getting money into the tax-free wrapper, even imperfectly timed, is far better than losing the allowance altogether. Speed, in this context, truly matters.
Q3: Can a surviving spouse who is not a UK resident still claim the APS allowance?
A3: This is a genuinely nuanced area that most articles skip over entirely. The general rule is that non-UK residents cannot subscribe to an ISA, residency is normally a hard requirement. However, HMRC has confirmed a specific carve-out: a surviving spouse or civil partner who is not a UK resident can still apply for and use the APS. They are permitted to make APS contributions even though they would not normally be eligible to subscribe to an ISA at all. That said, some ISA providers apply their own additional restrictions, so the survivor may need to shop around to find one willing to accept the APS from a non-resident. Once the APS is exhausted and normal ISA rules resume, the non-resident rules kick back in. This is one of those hidden permissions buried in HMRC's ISA regulations that most people, including some financial advisers, simply don't know exists.
Q4: If a spouse's ISA has fallen in value between the date of death and when the estate is distributed, does the APS reflect the lower value?
A4: In my experience, this is a source of genuine anxiety for surviving spouses watching a stocks and shares ISA fall in value during a prolonged probate process. Here is how it actually works. For deaths on or after 6 April 2018, the APS equals the higher of the date-of-death value or the value when the continuing ISA closes. This protects you if the value rises. But the rule does not work symmetrically in your favour if the value falls, the APS will simply reflect whichever of the two figures is higher, and if the value has declined by the time the estate is wound up, the date-of-death figure (which was higher) becomes the APS. So a falling market during probate does not reduce your APS allowance below what was there on the day of death. That is a meaningful protection, and one worth understanding clearly before you make any decisions.
Q5: Can the APS allowance be split across different types of ISA, for example, partly into a cash ISA and partly into a stocks and shares ISA?
A5: Absolutely, and this flexibility is genuinely useful. The APS allowance does not have to go into a single type of ISA. A surviving spouse can split it across a cash ISA, a stocks and shares ISA, an innovative finance ISA, or a combination of all three. For example, if the APS is £80,000, a survivor might choose to put £30,000 into a cash ISA for security and deploy the remaining £50,000 into a stocks and shares ISA for long-term growth. The only ISA type with an additional restriction is the Lifetime ISA: the APS can be applied to a Lifetime ISA, but only if the survivor is a UK resident under the age of 50, and any APS amount used in the LISA still counts against the £4,000 annual LISA limit. In practice, most clients dealing with APS won't be under 50, but for younger surviving spouses, this is worth factoring into the planning.
Disclaimer
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