It’s a detail that many people perhaps don’t appreciate
Joe Farmer(Image: Joe Farmer/Newspage)
Millions of savers could be sitting on a costly misunderstanding about ISAs, an expert has warned. Many believe they are completely tax-free when in reality they could face a significant bill further down the line.
ISAs have long been marketed as one of the simplest and most effective ways to save, allowing people to build wealth without paying tax. But one expert warns that this “tax-free” label is often taken too far – particularly when it comes to what happens after death.
The issue is inheritance tax. Currently charged at 40% on estates above £325,000, the threshold has been frozen for years, quietly dragging more and more families into the tax net. Crucially, ISA savings are included as part of the estate. That means a lifetime of careful saving, often built up with discipline over decades, could still be exposed to a significant tax bill.
Joe Farmer, an Independent Financial Adviser and co-founder at The Retirement Studio, said many have no idea they have to pay inheritance tax on their ISA savings.
He added: “I speak to clients every day who believe ISAs are completely tax-free, full stop. They’re genuinely shocked when I explain that on death, ISAs form part of the estate and can be subject to inheritance tax.”
He said the scale of the issue was often underestimated, even among those who considered themselves financially savvy.
Mr Farmer continued: “I saw a client just last week with an ISA worth over £300,000. That alone nearly takes them to the inheritance tax threshold, before you even consider their home or any other assets.”
For many, the problem is not the act of saving – it’s what hasn’t been considered afterwards.
He said: “This is the part most people haven’t thought about. They’ve done the right thing by saving into ISAs year after year, but they haven’t considered what happens to that money when they pass away.”
The consequences go beyond tax bills. Mr Farmer said ISA funds were often tied up in probate alongside the rest of the estate, leaving families unable to access the money when they needed it most.
He added: “I deal with bereavement cases and I regularly see ISA funds tied up in probate for months, sometimes years.”
For something so heavily marketed as tax-free, he believes the messaging has created a dangerous gap in understanding.
Mr Famer added: “It’s tax-efficient while you’re alive, but that doesn’t mean it’s free from inheritance tax.”
He said that the problem is often compounded by poor advice and a lack of forward planning.
He continued: “A lot of this comes down to structure being overlooked. Advisers focus on performance and returns, but not enough on what happens later.
“I always say to clients that structure is just as important as performance. There’s no point building a large ISA pot if a significant portion could be lost to tax or delayed in probate.”
With potential changes to pensions from 2027, which could see them brought into the inheritance tax net, the issue is only likely to grow.
