Are instructions needed before selling an ISA or cashing in Premium Bonds? Many savers worry about tax traps, paperwork and how HMRC or NS&I will react. This guide sets out clear legal and tax steps for selling or gifting ISAs and Premium Bonds so that decisions are compliant, efficient and defensible.
Key takeaways: what to know in one minute
- Selling or cashing in an ISA usually has no immediate tax liability because ISA wrappers shelter income and gains. However, withdrawing and gifting funds can have legal and IHT consequences.
- Cashing Premium Bonds is a disposal of an asset but prizes are tax-free; payouts are not taxed as income, but the underlying capital movement can matter for IHT and means-tested benefits.
- Gifting an ISA usually requires withdrawal and re-investment by the recipient—ISAs cannot be transferred as a funded gift while preserving the original wrapper except in limited spousal/executor cases.
- Record everything: dates, forms, identity checks, correspondence with ISAs providers and NS&I. HMRC and executors expect documentary trails.
- Use the right legal route (power of attorney, deed of variation, executor claim) to avoid later disputes and IHT surprises.
When to sell ISAs or cash in Premium Bonds: timing and triggers
When selling or cashing may be appropriate
- To meet a short-term cash need (home deposit, emergency, debt repayment).
- To simplify estates or consolidate holdings before death or incapacity.
- When expected returns elsewhere exceed ISA or Premium Bond benefits after considering loss of tax shelter or prize chance.
When to avoid selling or cashing
- If selling would use up the recipient's ISA allowance when gifting later (unless that is intended).
- If a future spouse or civil partner would benefit from the survivor rules for ISAs at death (see later).
- If compassionate gifting could trigger IHT consequences without proper documentation.
Tax consequences: gifting ISAs — what actually happens for HMRC
Can an ISA be gifted directly without cashing out?
ISAs cannot normally be assigned or transferred by changing the beneficial owner while preserving the original tax wrapper. Gifting an ISA usually requires the holder to withdraw funds (crystallise) and then the recipient opens their own ISA and pays in up to their annual subscription limit. The only exceptions are:
- Spousal survivor rules on death: survivors can inherit ISA tax benefits under a replacement allowance for the year after death; see HMRC guidance. Refer to the official HMRC page: Individual savings accounts (ISAs) - GOV.UK.
- Platform-supported transfers between accounts of the same person: moving an ISA between providers is routine if the owner remains the same.
Income tax and capital gains tax (CGT) considerations
- No income tax or CGT on gains while funds are inside an ISA. If the ISA is closed and the proceeds are invested elsewhere, normal tax rules apply on future income and gains.
- Gifting cash withdrawn from an ISA is not taxable as a disposal for CGT because cash itself has no capital gain. However, any subsequent investment by the recipient outside an ISA may create future CGT liability for them.
Reporting and HMRC expectations
- Gifts are not usually reported to HMRC at the time of gifting unless they affect tax allowances (e.g. capital gains reliefs or income tax liabilities). But if gifts are part of estate planning and exceed annual exemptions, they can affect Inheritance Tax (IHT) calculations on death.
Tax consequences: Premium Bonds — payouts, cashing and gifting rules
How NS&I Premium Bonds work for disposal and gifting
- Premium Bonds are a capital asset held by NS&I in the holder's name. Cashing in (redeeming) bonds returns capital with any outstanding prize wins. Prize winnings are tax-free in the UK. For NS&I procedures see: NS&I.
Tax events to consider
- Prize money is tax-free and does not need to be declared as taxable income.
- Cashing in bonds is not a taxable disposal for CGT because bonds are capital with no chargeable gain when redeemed for the original capital amount.
- If gifting Premium Bonds, legal ownership must change: NS&I requires identity checks and a specific process to transfer ownership or pay out to a third party. Keep evidence of the gift date.
Means-tested benefits and other interactions
- Gifts may affect entitlement to means-tested benefits for both giver and recipient if capital is moved. Seek advice where benefits are in payment or likely to be claimed.
How HMRC treats ISA transfers and bond payouts: practical guidance
HMRC view on ISA withdrawals used for gifts
- HMRC treats the money withdrawn from an ISA as the holder's property once in cash. The holder is free to gift it. HMRC does not levy tax simply because an ISA was withdrawn to make a gift, but the wider IHT rules may apply.
HMRC treatment at death
- ISA survivor allowance: when a spouse or civil partner dies, the surviving partner can receive an extra allowance equivalent to the value of the deceased's ISA(s) at death (replacement allowance), provided rules are followed. Document values and dates carefully and notify the ISA provider.
- Executors must report estate values to HMRC including the value of ISAs and Premium Bonds at the date of death for IHT purposes where applicable.
NS&I and provider reporting
- Providers typically report prize wins and interest-type income where reportable, but ISAs' internal returns remain tax-free and are not reported as taxable income. NS&I will confirm prize payments and redemption details on request.
Legal steps for gifting savings: deeds, nominees and paperwork (step-by-step)
Step 1: confirm legal capacity and identity
- Verify the holder has legal capacity to make the gift (mental capacity, not under undue influence). Use written confirmation if in doubt.
Step 2: choose the correct legal route
- Immediate gift: withdraw funds and sign a simple deed of gift (see template suggestions in the HowTo schema below).
- Gifting Premium Bonds: use NS&I transfer forms or request a change of ownership; retain confirmation emails or certified copies.
- Gifting while incapacitated: use an enduring power of attorney (EPA) or lasting power of attorney (LPA) that authorises financial decisions, following provider procedures.
Step 3: prepare supporting paperwork
- Required documents typically include: ID for donor and recipient, proof of address, signed deed of gift (date and signatures), bank transfer records, provider transfer or withdrawal confirmations. Keep photocopies.
Step 4: notify relevant institutions and HMRC where necessary
- Inform the ISA provider and NS&I in writing of the intended action and follow their prescribed forms. If the gift forms part of estate planning likely to affect IHT, discuss with a solicitor or tax adviser and maintain records for seven years.
Quick transfer and gifting process
📝 Step 1
Confirm identity, capacity and intent. Collect ID and proof of address.
💷 Step 2
Withdraw ISA funds or request NS&I transfer. Get written provider acknowledgement.
📂 Step 3
Execute a deed of gift and retain bank/transfer records for at least seven years.
⚖️ Step 4
Consider IHT and get legal advice for large gifts or estate planning.
Table: at-a-glance comparison — selling or gifting ISAs vs Premium Bonds
| Issue |
ISA |
Premium Bonds |
| Tax on withdrawal |
Tax-free while in ISA; withdrawals are cash (no immediate tax) |
Capital returned; prize winnings tax-free |
| Transfer of ownership |
Usually must withdraw; cannot assign wrapper between people |
NS&I supports change of ownership or payout and retitle |
| IHT considerations |
Value counts in estate; survivor ISA rules may help spouse |
Value counts in estate; documented gifts affect IHT calculations |
Avoiding IHT pitfalls when passing on ISAs and Premium Bonds
Common traps and how to avoid them
- Assuming gift equals exemption: gifts are potentially exempt transfers (PETs). If the donor dies within seven years, the gift may be counted for IHT unless it qualifies for an immediate exemption. Keep dated evidence and bank records.
- Failing to document informal promises: a verbal promise to transfer ISAs or bonds can lead to disputes. Use a deed of gift and inform the provider.
- Neglecting spouse vs non-spouse differences: spouses can benefit from special ISA survivor treatment; non-spousal gifts do not have the same rules.
Practical tips
- Keep a clear timeline of actions (withdrawal date, transfer date, receipt date) and retain provider receipts.
- For large gifts, consider a deed of variation or lifetime trust to control IHT exposure. Legal advice is strongly recommended for gifts approaching or exceeding the standard nil-rate band.
Practical checklist: selling, gifting and reporting to HMRC
- Confirm identity and capacity (ID, LPA documents if used).
- Check ISA rules with provider before withdrawing; note any penalties or restrictions.
- If gifting Premium Bonds, request NS&I transfer form or payout confirmation. Use NS&I online services where possible.
- Execute a simple deed of gift: donor name, recipient name, amount/description, date, signatures, witness. Store copies.
- Retain bank transfer/reference evidence showing when funds moved.
- For gifts over £3,000 in a tax year, record against annual exemption (donor) to help executors later.
- If the donor dies within seven years of a gift, notify executors and provide records for IHT calculations.
How to handle special situations (brief practical notes)
Gifting to minors
- Funds given to children under 18 should be held in a suitable account in their name or via a trust/legal guardian. For Junior ISAs (JISAs), the child must open the account and the annual subscription limits apply.
Gifting to non-spouse adults
- The recipient will normally need to invest the cash into their own ISA subject to their annual allowance; the donor's allowance is not transferable except on death under replacement rules.
When the giver loses capacity
- An attorney under an LPA with property and financial affairs authority can manage, transfer or withdraw ISAs and Premium Bonds according to the legal scope of the LPA and provider acceptance. Providers typically require certified copies of the LPA.
FAQ: questions people ask about selling or gifting ISAs and Premium Bonds
Can an ISA be transferred to another person without closing it?
No. ISAs cannot normally be assigned to a new owner while keeping the original wrapper. The usual route is withdrawal and the recipient opening their own ISA and paying in subject to their allowance.
Are Premium Bond prizes taxable if gifted?
Prize winnings remain tax-free regardless of who receives them. The act of gifting bonds requires NS&I procedures for change of ownership.
Do gifts of ISA money reduce Inheritance Tax nil-rate band?
Potentially yes. Gifts are PETs and count for IHT if the donor dies within seven years, unless covered by exemptions. Keep records and seek advice for large gifts.
What paperwork does NS&I require to transfer Premium Bonds?
NS&I requires identity evidence and a signed transfer or nomination form; response times vary. Use the NS&I website or contact them directly for current forms: NS&I.
Can spouses avoid tax when inheriting an ISA?
A surviving spouse can receive a replacement ISA allowance reflecting the deceased's ISA value, preserving tax benefits if handled correctly and notified to the provider.
Should gifts be reported to HMRC when made?
Not routinely. Reporting typically occurs on death if gifts affect IHT calculations. For clarity and defence, maintain written records of all gifts.
- Gather ID, ISA provider details and NS&I account references and make scanned copies of recent statements.
- If planning a large gift, execute a deed of gift and take professional tax or legal advice to assess IHT and benefit interactions.
- Inform the relevant provider (ISA manager or NS&I) in writing and follow their transfer/withdrawal checklist; keep all acknowledgements.
Alan White
With over 15 years of experience helping individuals navigate savings and investment options, this author provides clear, practical guidance on ISAs, Premium Bonds, and alternative savings products. Every article on ISA vs Premium Bonds draws on real-world experience, offering actionable advice, risk awareness, and strategies to help readers make informed decisions, plan for savings goals, and understand tax and legal implications. The goal is to empower readers to confidently manage their money and maximise their financial growth.