How inheritance tax affects stock market investments

Inheritance tax has long been seen as something that only affects the very wealthy.

For the most part, that's still true. In 2021-22, just 4.4% of estates paid it. However, by 2024, that figure had risen to around 6%, driven by frozen thresholds and rising asset prices. And with plans to include pensions from 2027, it's thought that around one in 10 estates will end up facing a bill by the close of the decade.

This guide explains how stock market investments are treated when you die, what the upcoming rule changes mean, and gives you the lay of the land on the implications for your portfolio.

A quick overview of UK inheritance tax (IHT)

Inheritance Tax is a tax on what you leave behind when you pass away, including your home, money in the bank, investments, and the garage full of gym equipment you used once during lockdown.

If the value of your estate creeps over a certain limit, HMRC is waiting in the wings to take a hefty slice. The standard rate is a sobering 40%.

Everyone in the UK is entitled to pass on the first £325,000 of their estate without facing this tax. This allowance is known as the "nil rate band".

On top of that, if you're leaving your main home to direct descendants, like your children or grandchildren, you can add an extra £175,000 allowance, known as the "residence nil rate band".

Put simply, that's a combined tax-free allowance of up to half a million pounds per person.

There's also some good news for married couples or civil partners. Assets passed between spouses are completely exempt from inheritance tax. That is, until the other partner also dies.

Not only that, but if the first partner doesn't use their full allowance, the remaining portion passes over to their surviving partner.

In practice, that means a couple can leave up to a million pounds tax-free, provided they pass their home down the family line. Who says estate planning can't be a love language?

Your executors – those responsible for carrying out your wishes – are the ones who have the unenviable job of settling the bill with HMRC before anyone else sees a penny.

But while the tax isn't applied until death, HMRC has a long memory – think of that elephant from the old Rolo advert.

If you gave away assets during your lifetime and then died within seven years, those gifts may still be pulled back into your estate for tax purposes.

To read more about this topic, check out our guide on preserving wealth via inheritance planning.

Key terms at a glance

How does IHT apply to stocks and shares?

Just like your house, cash savings, and neglected garage gym equipment, your shares are tallied up as part of your estate for IHT purposes.

HMRC values them at their market price on the day you pass away, and if this pushes your total estate over the tax-free thresholds, the usual 40% rate applies.

This includes all of your investments in the stock market – and even those outside it in many cases, including index funds, corporate bonds, gilts, commodities, and more.

While ISAs shelter you from capital gains and income tax while alive, these tax wrappers lose their magic upon death.

That means your stocks & shares ISA will be taxed as part of your estate – unless you're passing to your spouse or civil partner, where inheritance tax is not applicable.

Currently, pensions – including SIPPs – offer an oasis of relief in the inheritance tax desert. Most pension funds, held within discretionary trusts, fall outside the taxable estate on death, making them an attractive option for passing on wealth without a 40% haircut.

However, there are exceptions.

Certain public sector pensions, such as NHS and judicial schemes, are included in your estate for inheritance tax purposes.

For years, investors drained other savings first, preserving pensions that would be untouched by IHT for their heirs. But HMRC is about to spoil the fun. From April 2027, new rules mean most unused pension funds will become subject to inheritance tax, depending on your circumstances.

However, some investments still enjoy special treatment.

Shares listed on AIM – the Alternative Investment Market, a sub-market of the London Stock Exchange – are typically treated differently for inheritance tax purposes, offering a route to 100% inheritance tax relief under certain conditions. Hold qualifying AIM shares for two years or more, and HMRC lets you pass them on without inheritance tax.

The bad news? That loophole is closing too. Well, kind of. From April 2026, AIM shares will no longer qualify for the full 100% relief. Instead, they'll get a 50% discount.

All investments have risk. Examples are not recommendations.

The rules at a glance

• Regular shares (even in ISAs) count fully towards your estate and face inheritance tax at 40% unless passing to a spouse
• This includes individual shares, mutual funds, ETFs, corporate bonds, gilts, and more
• Pensions currently escape IHT, but most will lose this benefit from April 2027
• AIM-listed shares are not counted at all under the current rules, but from April 2026, half their value will be included in your estate.

Bottom line

Most stock market investments, including ISAs and listed shares, are fully counted towards your estate and taxed at 40% if you exceed the thresholds.

Pensions currently escape inheritance tax, but from April 2027, most unused pension pots will be brought into the tax net.

AIM-listed shares have long been treated as exempt, but from April 2026, only half their value will be excluded.

If you're investing with the next generation in mind, now is the time to review what your portfolio might one day cost them. Speaking to a financial adviser is a smart move, especially with the rules being chopped and changed so often.

Share this