I was trying to understand what happens to my ISA's when I die. I was wondering if ISA investments sold after my death would be hit by CGT in addition to other taxes. I trotted along to the HMRC website, and it said:

Q. What happens if I die?
A. Your ISA will end on the date of your death. There will be no tax to pay on income or capital gains up to that date, but your personal representatives will have to account for tax on any income or gains arising after your death. The ISA manager will either sell the investments and pay the proceeds to your personal representatives (or a beneficiary of your estate), or transfer the investments directly into their hands. The terms and conditions of the ISA may specify which it will be.

Does that mean the investments are subject to CGT when they are sold after death? Would that mean that it may be better to 'bed and breakfast' the investments to realise the gains while I'm still OK? I'm wondering if funds held very long term within an ISA, are better 'swapped-out' and replaced by the shares I trade which are not within an ISA? After all, there seems little point protecting myself from CGT, if I'm not realising gains.

1. Profits taken on investments held within an ISA during your lifetime are not subject to CGT.
2. Profits taken on investments held OUTSIDE an ISA during your lifetime ARE subject to CGT on disposal, on that part of the profit that takes you over the exempt threshold for the year.

3. Where investments are held until death, no CGT applies, as it is a tax on disposals during one's lifetime.

4. On death, the holdings within the ISA are transferred out into a normal non-ISA dealing account. The value they have on the date of death is the probate value (there is a complex little calculation for shares and similar, but it's not particularly significant).

I'll repeat : CGT is not levied on death, only on profits taken on disposals within your lifetime.

Therefore the WORST thing to do is sell everything that is not protected within an ISA on the DAY BEFORE you die, incurring massive capital gains tax (because you are alive), when deferring the intended cash-in by one day would have saved you all the CGT (because you were now dead and therefore CGT is no longer applicable).

5. And if the investments continue to grow in value after your death, before they are distributed to your heirs? It won't affect YOUR CGT, since you are dead, and not liable. It won't affect anybody else's CGT either, unless the increase is large AND the executors (or the subsequent owners) cash in too much profit in any one tax year. (Profit being sale value minus probate value). You may need to read HMRC leaflets (with ice-pack on head!) or consult a specialist on probate and CGT to get the full details.


Hope that's at least moderately clear, but do ask again if it's not!

When the ISA provider is notified of the death of the account holder, the assets within the ISA are moved out into a non-ISA account until the executors of the will (or administrators of the estate if the deceased was foolish enough not to have a valid will) give instructions for the sale or transfer of those assets.

Obviously, when the account holder dies, nothing in the ISA is subject to CGT or income tax; once transferred into the non-ISA account, the executors/administrators will have to account for any income arising or any profits from sales prior to the transfer to the beneficiaries. There may or may not then be income tax to pay (not on dividends normally), or CGT if the profits were vast after the death and before the estate is wound up, but this is not likely except on amazing fluke investments in the usually short period involved.

A reminder to the ISA holder : try to keep assets within the ISA until death rather than selling them off earlier, unless you really need the money to live or to make lifetime gifts to the family to save a bit of IHT. Spend the non-ISA money first!

I think I read about AIM shares being available for ISA investment soon. Watch what Osborne says before trying, and allow time for ISA providers to change their software so that it doesn't reject attempts to buy AIM shares in an ISA.

It will also be revealing if the AIM > ISA announcement is accompanied by one saying "AIM shares will no longer be exempt from IHT after 2 years" : Chancellors are renowned for giving with one hand while taking away with the other, in the hope that nobody spots that they are actually increasing the tax take!

Lyndon Edwards:

Thanks for that comment. Can you elaborate on ANY circumstances in which HMRC will allow adjustments to the probate valuation after death for IHT purposes?
I was thinking of situations where the deceased's house does not sell in a dead property market for anything like the agreed probate valuation until several years later, at a reduced price.