Do inherited ISAs continue for the rest of a widow’s life?

Q: Does an inherited ISA continue for the rest of a widow's life?

A: The short answer is yes. Both cash and stocks and shares ISAs can be left to a spouse, who will continue to enjoy the tax-free benefits of these savings and investment plans for the rest of their life.

Effectively, an inherited ISA (or portfolio of ISAs) becomes part of the spouse’s own ISA assets so can continue to grow in a tax-free environment. This also means there won’t be an income tax, dividend tax or a capital gains tax charge if the surviving spouse withdraws funds from these savings plans.

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This remains the case even if the surviving spouse has ISAs in their own name and has maximised holdings for that year. In simple terms, the widow’s (or widower’s) annual £20,000 allowance is ‘uplifted’, if needed, to include the value of ISAs held by their spouse at the time of their death.

There will also, of course, be no inheritance tax (IHT) to pay — not because ISAs have any special IHT exemption, but because this tax does not apply to wealth transfers between married couples and those in a civil partnership.

• Read: Can I protect my ISAs from Inheritance Tax?

However, Robert Salter, a director at the accountancy firm Blick Rothenberg, points out that these tax breaks don’t apply to unmarried couples, regardless of how long they might have lived together, or whether they have children or own property together. Equally, they won’t apply if you are passing ISA holdings to children or grandchildren.

ISAs will form part of your estate for inheritance tax purposes when leaving assets to the next generation (or anyone other than a spouse), and IHT will be charged if assets exceed the individual nil-rate band. Everyone has a nil-rate band, currently £325,000. If you die first and transfer all your assets to a spouse, then both spouses’ nil-rate bands can be utilised when the surviving spouse dies and passes on any remaining assets. There are additional IHT-free thresholds for residential property.

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It’s also worth noting that ISAs left to anyone other than a spouse lose their tax-protected status, so beneficiaries will not benefit from tax-free income and growth.

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one ofFidelity’s advisers or an authorised financial adviser of your choice.