An ISA Keeps Its Tax Shelter for Three Years After Death

What happens to an ISA when the owner dies is one of the few pieces of good news in an estate: the tax shelter does not switch off on the day of death. The account becomes what the rules call a continuing account of a deceased investor, and the interest, dividends and growth inside it stay free of income tax and capital gains tax while the estate is sorted out. Nobody has to rush to move the money to protect it from tax in the first weeks.

What the shelter does not do is last forever, and it does not cover every tax. It runs down on a clear timetable, and it has never covered inheritance tax at all. So the honest picture is a helpful breathing space with a defined end, rather than a permanent tax exemption that passes to whoever inherits.

This guide explains what the continuing account covers, when the shelter finally ends, and what tax the estate faces on the growth and interest after that point.

The short answer: the shelter continues, for a while

Before the rules changed, an ISA lost its tax status on the day the holder died, and any interest or growth after that was taxable while the estate was administered — which felt like a penalty on families who could do nothing to speed probate up. That was fixed for deaths on or after 6 April 2018, when the continuing account was introduced.

Since then, when an ISA holder dies, the account keeps its tax advantages automatically. The provider marks it as a continuing account of a deceased investor, and everything that grows inside it — interest on a cash ISA, dividends and capital gains on a stocks and shares ISA — remains sheltered from income tax and capital gains tax during the period the estate is being wound up. The executor does not have to take any special action to switch the shelter on; it happens by operation of the rules.

The practical effect is that you are not forced to sell investments or empty a cash ISA in a hurry simply to avoid tax. You can leave the money where it is, take the time probate genuinely needs, and deal with the ISA in an orderly way. That is the breathing space the rule was designed to give.

What the continuing account covers, and the one tax it does not

It is worth being precise about the scope, because a general belief that an inherited ISA is simply tax-free leads people to the wrong conclusions.

The shelter covers income tax and capital gains tax on what happens inside the wrapper after death. Cash ISA interest keeps rolling up untaxed; a stocks and shares ISA continues to receive dividends and can rise or fall in value without a capital gains tax charge on the growth during the period. This applies to the money as it sits in the account being administered — not to the beneficiary once they have received it into their own hands.

Two limits matter. First, no new money can be paid into the deceased's ISA — the continuing account preserves what is there but cannot be added to. Second, and most importantly, the shelter has nothing to do with inheritance tax. The value of the ISA at the date of death is part of the estate and is assessed for inheritance tax like any other asset. Families who assume an ISA is outside inheritance tax because it was tax-free in life are in for an unwelcome surprise, and it is a common one where one partner did all the admin and then died, leaving the survivor to piece the position together.

When the shelter ends

The continuing account is generous but time-limited. It ends on the earliest of three dates, and it is worth knowing all three because which one applies depends on how the estate is handled.

• The completion of the administration of the estate. Once the estate is wound up and the assets distributed, the ISA's job as a continuing account is done and the shelter ends.
• The closure of the account. If the executor closes the ISA — selling the investments or withdrawing the cash to distribute it — the shelter ends at that point.
• The third anniversary of the death. If neither of the above has happened, the shelter ends automatically three years after the date of death. A long-running estate cannot keep the tax advantage indefinitely.

Source: GOV.UK, Individual Savings Accounts (ISAs): If you die, HM Revenue and Customs guidance, current at the time of writing.

For most estates it is the completion of administration or the closure of the account that comes first, and the three-year backstop rarely bites. But it does matter in estates that drag on — a disputed will, a hard-to-sell property, a business to unwind — where the three-year limit sets a firm end date after which the ISA is taxed normally. Where an estate is asset-rich but short of cash and slow to settle, that timetable is one more pressure, as we discuss in asset rich, cash poor, and selling to pay the tax.

What tax the estate owes after that date

Once the continuing account ends, the ISA is just an ordinary account or investment holding, and the normal tax rules apply from that point on.

Interest, dividends and gains arising after the shelter ends are taxable in the usual way — during administration they fall to be dealt with as income and gains of the estate, and after distribution they belong to the beneficiary and sit within their own tax position. This is not a penalty; it is simply the shelter coming off. In practice the amounts involved after death are often modest, but they are real, and an executor has to account for them accurately in the estate accounts rather than assuming everything inside a former ISA stays tax-free.

The point to take away is timing. If the executor is going to close the ISA and distribute the money anyway, doing so in a reasonable timeframe keeps things simple and avoids a tail of taxable income building up in a long-dormant former ISA. Keeping clear records of the value at the date of death, the value when the shelter ended and anything that arose in between makes the eventual tax position straightforward. The wider set of accounts and contracts an executor has to close down is mapped out in our guide to bereavement admin, assets and contracts.

Cash ISAs, stocks and shares ISAs, and the Lifetime ISA

The continuing account rules apply across the main ISA types, but the detail differs enough to be worth separating.

A cash ISA is the simplest: interest continues to be credited tax-free during the continuing-account period, and the executor decides when to close it and pass on the cash. A stocks and shares ISA works the same way for tax, but the value moves with the market, so the executor has a decision to make about whether to sell the investments or transfer them, and when — the growth stays sheltered until the account is closed or the period ends.

The Lifetime ISA is the exception that catches people out, because it carries its own rules on death, its own government bonus, and different treatment depending on whether the saver had bought a first home or reached retirement. It does not behave like a standard ISA when the saver dies, and it deserves to be looked at on its own terms, which we do in a Lifetime ISA when the saver dies before buying. If the person who died held one, do not assume the general ISA position above applies to it unchanged.

The spouse's extra allowance and inheritance tax

There is a second, separate benefit for a surviving husband, wife or civil partner that people often confuse with the continuing account, and it is worth keeping the two apart.

On top of their own annual ISA allowance, a surviving spouse or civil partner is entitled to an additional permitted subscription — an extra allowance equal to the value of the ISAs held by the person who died. It lets the survivor shelter the same amount of money inside an ISA in their own name, so the couple do not lose the tax-free status simply because one of them has died. This is a right the survivor claims through a provider; it is not the same thing as the continuing account, which is about the deceased's own account during administration.

On inheritance tax, the general rule holds: the ISA counts in the estate, but anything passing to a spouse or civil partner is exempt in the usual way, so an ISA left to a surviving husband or wife typically carries no inheritance tax on that transfer. Where the ISA passes to someone else, its date-of-death value is part of the estate for inheritance tax like any other asset. Keeping the ISA paperwork safe through all of this matters, both for the tax and to protect against fraud — old statements and account details in an empty house are exactly what should be secured or destroyed, alongside the wider clean-up that spares a family chasing scattered contracts and lapsed cover such as a life policy that lapsed because the payer died. If sorting one estate has you thinking about your own, you can get life insurance quotes and see how cover would sit alongside your savings.

Scotland and Northern Ireland

ISAs are governed by UK-wide tax rules, so the continuing account, the three-date timetable and the spouse's additional allowance work the same way wherever in the UK the holder lived. There is no separate Scottish or Northern Irish ISA regime.

What differs is the administration wrapped around the account. In Scotland the executor obtains confirmation rather than a grant of probate, through the sheriff court, and it is confirmation that a provider will want to see before releasing a larger ISA balance. In Northern Ireland probate is obtained through its own court service. Neither changes the tax treatment of the ISA — the shelter still runs to the earliest of the same three dates — but the point at which the executor can actually close the account and distribute the money depends on the local process, so factor that into the timetable rather than assuming the England and Wales route applies.

Frequently asked questions

Does an ISA stay tax free after the holder dies?

For a period, yes. The account becomes a continuing account of a deceased investor, so interest, dividends and gains stay free of income tax and capital gains tax while the estate is administered. No new money can be paid in, and the shelter does not last indefinitely — it runs down on a set timetable rather than passing on as a permanent exemption.

When does the continuing account end?

It ends on the earliest of three dates: the completion of the administration of the estate, the closure of the account, or the third anniversary of the death. After that the ISA loses its tax treatment, and any income or gains fall to be taxed in the normal way, either in the estate during administration or in the beneficiary's hands after distribution.

Does the ISA still count for inheritance tax?

Yes. The shelter covers income tax and capital gains tax, not inheritance tax. The value of the ISA at the date of death forms part of the estate for inheritance tax purposes, although anything passing to a husband, wife or civil partner is exempt in the usual way, so an ISA left to a surviving spouse usually carries no inheritance tax on that transfer.