Previously, ISAs lost all their tax benefits on the death of the holder and formed part of their estate for inheritance tax purposes. From now on, for deaths on or after 3 December 2014, the surviving spouse will be deemed to have an additional ISA allowance, equal to the amount the deceased spouse had in their ISAs. The new rules mean spouses can preserve any tax-free income stream their partner had received.
The new structure is complicated – technically, the ISA wrapper and its tax benefits still disappear on death and the investments are still theoretically part of the estate for inheritance tax purposes. This means that if the ISA is assigned to anyone but the spouse, it will be taxed as before. The current ISA limit is currently £15,240 (2015-2016).