Can I shield my ISAs from inheritance tax?

ISAs are one of the most popular savings and investment products – and inheritance tax (IHT) is one of the most hated taxes.

So, a natural question posed by many ISA customers is whether it’s possible to protect ISAs from the dreaded inheritance tax, and pass these tax-efficient vehicles onto loved ones without the taxman taking a bite out of them.

The question has perhaps become more pertinent given that pension pots, currently exempt from IHT, will be liable for the tax from April 2027.

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The bad news is that there is no special exemption for ISAs from IHT. However, there are a few ways to ensure the tax isn’t due on ISA money when you die, or to reduce a potential inheritance tax bill.

Pass 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 – or any of your wealth, for that matter – is to leave it to them when you die.

Shaun Moore, tax and financial planning expert at the wealth manager 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.”

That’s on top of anything they want to contribute via their own ISA allowance, which is currently £20,000 per tax year.

Work out whether there will be an IHT liability

It’s sensible 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.

For money passed to beneficiaries other than a spouse, 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.

“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,” comments Moore.

“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.”

Gift 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.

For example, if you intend to leave your savings to a loved one when you pass away, it may be worth considering gifting money to them during your lifetime instead.

Moore tells MoneyWeek: “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.”

He adds: “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.”

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.

Jonathan Moyes, head of investment research at Wealth Club, notes: “We have noticed a growing trend among investors to gift surplus income, since this is IHT free and does not fall within the seven-year limit on gifts. With higher yields today, this can be a valuable way to prune future IHT liabilities.”

Moore adds 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.”

Consider switching into AIM shares – but watch out for the reduced relief

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 says 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.”

Despite the reduced tax relief, Moyes believes AIM portfolios will increase in popularity in the coming years, after the government’s decision to make pensions liable to inheritance tax.

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. The most popular managed AIM ISAs on Wealth Club over the past 12 months are the Octopus AIM IHT ISA and Downing Estate Planning AIM ISA.

The Octopus portfolio has a bias towards the largest companies on the junior market, while Downing looks to invest in unloved and overlooked opportunities.