A growing number of people are unlocking a valuable but often overlooked inheritance tax perk that could protect large sums of money.
Financial experts are urging couples to take action now, before it’s too late.
The rule - known as the additional permitted subscription - lets a surviving husband, wife or civil partner inherit their late partner's ISA allowance, as well as the money or investments inside it.
This means they can keep the savings tax-free, on top of their own annual ISA allowance.
It could shield "tens of thousands of pounds from tax" and help protect family wealth for the long term.
Experts say many people still don't realise this rule exists, and with inheritance cases on the rise, they are calling for better awareness so families don’t miss out.
Recent figures from Hargreaves Lansdown reveal that inheritance of ISAs through this mechanism has jumped by 33 per cent in the past year alone. Over two years, the increase stands at 68 per cent, a sign that more families are waking up to the benefits.
The additional permitted subscription (APS) system, introduced in April 2015, gives a surviving husband, wife or civil partner an extra ISA allowance equal to the value of their partner’s ISA.
This amount is based on either the ISA’s worth on the day the person died or its value when probate ends - whichever is higher - allowing more money to stay protected from tax.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: "These inherited allowances aren't always well understood, but can be incredibly valuable potentially protecting tens of thousands of pounds inherited from a spouse from tax."
ISA alert: Families rush to use little-known inheritance perk that can save thousands
| GETTYThe inheritance process offers flexibility, as beneficiaries need not have been named in the will to claim the additional allowance. They can utilise this extra subscription to shelter other assets from taxation, providing valuable estate planning opportunities.
Coles emphasised the importance of couples discussing their investment strategies whilst both partners remain healthy.
She said: "In some cases, this will mean working together on investments, and talking about how they work and what they are designed to do, while you're both in good health."
Professional financial guidance may prove beneficial for surviving partners who lack investment experience.
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ISAs are useful tools for those looking save and avoid paying tax | GETTYFinancial advisers can help bereaved partners make sense of what they’ve inherited and decide if changes are needed based on their new situation and goals.
In many cases, the inherited ISA investments can be moved into the survivor’s own ISA account without being sold, a process known as a transfer in specie. This keeps the investments intact and preserves their tax-free status.
There’s no deadline for making changes to the portfolio, so some may act quickly to reflect their own financial plans, while others might wait until they feel ready.
Importantly, this inherited ISA allowance is separate from the usual annual ISA limit. That means it can be used to protect additional savings from tax, even if the person didn’t directly inherit the ISA itself but received other assets.
The ISA limit is £20,000 each tax year
| PAAnalysis shows clear trends in how people handle inherited ISAs. Almost half of Hargreaves Lansdown clients (48 per cent) made no changes to their portfolios for at least a year after inheriting them.
At the other end, around 15 per cent , roughly one in seven, made changes within just two weeks, suggesting a desire to quickly tailor the investments to their own goals.
Coles warned about potential pitfalls for inexperienced investors who might liquidate holdings prematurely. She cautioned that converting income-generating investments to cash whilst maintaining previous withdrawal rates could deplete savings more rapidly than anticipated.
The spectrum of responses highlights varying confidence levels amongst inheritors, with some potentially avoiding changes due to unfamiliarity with investment management rather than strategic choice.