What will happen to your investment portfolio when you die?

It generally takes considerable time and effort to build a strong investment portfolio. Perhaps you’ve been diligently putting money aside for years, or worked hard accumulating wealth to fund a comfortable retirement?

However, you may have funds invested at the time you die, so it may be wise to think about what could happen to the money you leave behind.

By understanding how your investments may be taxed on your death and ensuring your portfolio is covered by your estate plan, you could ensure that more of your wealth is passed on to loved ones.

Read on to discover what might happen to your investments when you die.

The tax-free status of your ISA will be protected if you pass it on to your spouse or civil partner

If you have one or more ISAs, you probably set them up to shield some of your wealth from tax.

While you can leave your ISA to whoever you choose, only your spouse or civil partner will retain the full tax benefits. This is known as an Additional Permitted Subscription (APS).

In addition to their normal ISA allowance, if you die, your spouse or civil partner can add a tax-free amount up to either:

  • The value of your ISA when you died.
  • The value of your ISA when it’s closed.

For example, if you pass on a Stocks and Shares ISA with £25,000 in it, and a Cash ISA with £10,000 in it, your spouse or civil partner can temporarily increase their ISA allowance by £35,000, giving them a total allowance of £55,000 in the 2023/24 tax year.

To use this additional allowance, your beneficiary will usually need to pay the money into their current ISA or arrange a new one within three years (or 180 days after your estate is settled, whichever is later).

However, if you choose to pass your ISA on to someone other than a spouse or civil partner, they won’t benefit from this APS. So, they could pay Income Tax, Dividend Tax, or Capital Gains Tax (CGT) on the savings they inherit.

Also, your ISAs may form part of your estate for Inheritance Tax (IHT) purposes, so your beneficiaries might have to pay IHT on any ISA funds they receive from you.

General Investment Accounts won’t receive any tax benefits

If you pass on any General Investment Accounts (GIA) to your loved ones they won’t receive any tax benefits.

Any capital gains you’ve made on your investments are negated by your death, so there’s usually no CGT to pay when you die. However, your beneficiaries may be charged CGT if they decide to sell your shares.

Additionally, if a property or asset is sold during probate and its value rose since the person died, there may be CGT to pay.

Your shares may also be considered part of your estate for IHT purposes, so your beneficiaries may pay IHT on them unless you pass them on to a spouse or civil partner.

If you have a joint GIA, the account will automatically be transferred to the co-owner, regardless of the directions contained in your will.

Premium Bonds can’t be transferred and will need to be cashed in

Premium Bonds can’t be transferred to people when you die. But your beneficiaries can cash them in and inherit the funds.

They have up to 12 months after your death to sell your Premium Bonds. During this time, you’ll still be eligible to win and claim prizes.

So, leaving your Premium Bonds invested for the full 12 months could help your beneficiaries maximise their inheritance. Also, any prizes they win are tax-free and there won’t be any CGT to pay when they sell your Premium Bonds.

Read more: 8 fascinating pros and cons of Premium Bonds

Deferred tax on investment bonds could be payable on your death

Investment bonds can offer a tax-efficient way to hold investments in your portfolio.

Under the “5% tax-deferred rule”, you can withdraw up to 5% of your original investment each year without an immediate tax charge. Any unused allowance can be carried forward to the next tax year.

Deferring tax might be useful for higher- and additional-rate taxpayers who want to delay payment until their circumstances change. For example, if you’re close to retirement age, it might be helpful to defer paying tax until you move into a lower Income Tax band when you retire. It could also be useful if you’ve used up your CGT Annual Exempt Amount.

However, investment bonds are not tax-free and any tax you have deferred could be payable when you die.

How much tax is due will depend on the size of any gains made. It may help your beneficiaries to seek professional advice to ensure they manage the situation in the most tax-efficient way.

Consider incorporating your investment portfolio into your estate plan

Incorporating your investment portfolio into your estate plan could ensure that your wealth is passed on to the beneficiaries of your choice.

A financial planner can help you achieve this in the most tax-efficient way, giving you the peace of mind that your loved ones will receive as much of your wealth as possible.

Get in touch

If you’d like to learn more about including your investment portfolio in your estate plan, we’d love to hear from you.

Please email us at mail@delaunaywealth.com or call 0345 505 3500.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning, or will writing.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.