Investing may be an effective way to grow your wealth over time. When you retire, you might cash in some of your investments to fund your lifestyle. However, you won’t necessarily use all those funds.

That’s why it’s important to understand how your investments are treated when you die, so you can factor them into your estate plan. You may also need to consider the tax that your beneficiaries could pay if they inherit your investments.

Read on to learn what happens to your investments when you die.

Only a spouse or civil partner can retain the full tax benefits of your ISA

The tax-free status is one of the primary benefits of investing through a Stocks and Shares ISA. However, the tax treatment of your ISA after your death depends on who inherits it.

You can pass your ISA to whoever you like, provided you give clear instructions in your will. At this point, it becomes a “continuing ISA” until either:

• The executor of the will closes the ISA
• The administration of your estate is completed.

At this stage, the funds should be transferred to whoever inherits the ISA. However, if neither of these events happen and no action is taken for three years, the provider will close the ISA.

If a spouse or civil partner inherits your ISA, they benefit from a temporary increase in their ISA allowance, which equals the amount they inherit from you. This is called an “Additional Permitted Subscription (APS)” and covers all ISAs you pass on, regardless of which provider they are with.

For example, imagine you pass on a Stocks and Shares ISA with £30,000 in it, and a Cash ISA with another £20,000 in it. Your spouse or civil partner receives an additional £50,000 APS on top of their own ISA allowance, giving them a total allowance of £70,000 in the 2023/24 tax year.

This allows them to contribute the inherited funds to their own ISA without exceeding their ISA allowance, so they retain the tax-efficient benefits. They can decide to transfer investments to their own Stocks and Shares ISA or ask the provider to sell the investments and pay the cash to them.

Your spouse or civil partner typically needs to transfer the funds into their own ISA, or open a new one within three years, to benefit from the APS. However, it’s important to note that certain providers may not allow you to use an APS from another institution.

Conversely, if you leave your ISA to anybody that you are not married to or in a civil partnership with, they can’t benefit from the APS. As a result, they may pay Income Tax, Dividend Tax, or Capital Gains Tax (CGT) on any inherited funds that exceed their own ISA allowance.

Your family may also pay Inheritance Tax (IHT) on any funds in an ISA as they form part of your estate. That said, your spouse or civil partner can inherit your entire estate without IHT.

General Investment Accounts (GIAs) do not receive any tax benefits

If you have shares in a General Investment Account (GIA) they won’t receive any tax benefits when you pass them on.

Any capital gains you have generated since you purchased the shares are negated by your death, so there is typically no CGT to pay at this stage – although your beneficiaries may face a charge when they come to sell them. The shares may also still form part of your estate, so your family could pay IHT on them. 

Again, the exception to this is if you pass the investments to a spouse or civil partner, as this doesn’t typically trigger an IHT charge.

If you have a joint GIA, it will automatically pass to the other owner when you die, regardless of the instructions in your will.

Premium Bonds can’t be transferred to other people when you die

You can’t pass Premium Bonds on to other people when you die. Fortunately, they can be cashed in and your beneficiaries will inherit the funds.

The Premium Bonds don’t need to be sold immediately, and your beneficiaries have 12 months after your death to arrange this. During that time, you are still entered into the monthly prize draw and your beneficiaries can claim prizes.

So, it may be useful to leave Premium Bonds invested for as long as possible, as your beneficiaries could potentially boost the amount that they inherit. Additionally, they will not pay tax on any prizes they win and there is no CGT to pay when selling the Premium Bonds.

Deferred tax on investment bonds may be payable on your death

Investment bonds allow you to withdraw 5% of your original investment each year without a tax charge. This could be a useful way to draw income without immediately paying tax on it. However, the tax is only deferred, and must be paid when the bond is cashed in or matures.

This might be useful for investors who want to defer tax until their situation changes. For instance, you may fall into a lower tax bracket during retirement, so it could be more efficient to pay the tax then, instead of while you are working.

That said, any unpaid tax is normally due when you die. If you have generated significant gains from your investment bonds, this could result in a large tax charge being applied to your estate.

It may be useful for your beneficiaries to seek professional advice to find the most tax-efficient way to manage the situation.

Your pension is not normally covered by your will

Your defined contribution (DC) pension can be an effective way to pass wealth to your loved ones as it typically falls outside your estate for IHT purposes.

However, it’s important to note that it is not covered by your will. Instead, you usually need to fill out an “expression of wishes” form to nominate who you want to inherit any remaining pension funds.

Additionally, your beneficiaries may pay Income Tax on withdrawals from an inherited pension if you die after 75. This is charged at their marginal rate.

You can find more information about how your pension is treated when you die in our recent article on the importance of an expression of wishes form in your estate plan.

You may need to consider how your investments fit into your estate plan so you can ensure that your assets are inherited by your chosen beneficiaries. Planning ahead could also help your family mitigate a large tax bill. 

Get in touch

If you need guidance about investments and estate planning, we are here to help.

Please contact us at hello@ardentuk.com or call 01904 655 330. As an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.