Funds in an ISA at death are subject to IHT, and this is a point that is often overlooked. Only transfers to spouses from ISAs would be free of IHT, and the surviving spouse may pass the funds into their own ISA by way of an additional permitted subscription.
There is, however, one possible exception to this. It’s possible for shares listed on the Alternative Investment Market (AIM) to be held in an ISA, and provided the companies invested in qualify for Business Relief (BR) and the shares are held for at least two years prior to death, those investments may be removed from the IHT net. Advice should be sought before investing in AIM shares as these are generally considered higher risk from an investment perspective. To the extent an ISA is not being left to a spouse on death, and where BR does not apply, it may be efficient to draw on the capital in an ISA in later life.
You may consider investment bonds because they offer the ability to withdraw up to 5% of the total invested, cumulatively, each year without giving rise to a tax charge. Any withdrawals in excess of the accumulated 5% allowances will give rise to chargeable event gains.
Gains from UK bonds are taxed as the top slice of income and attract a 20% notional tax credit to cover the basic rate tax (but this cannot lead to a tax repayment). This means that tax is only payable on gains by higher and additional rate taxpayers.
Gains on offshore bonds are added to the savings income and taxed as such, meaning the personal savings allowance and starting rate for savings can be applied to the gains. However, it’s rare for these bonds to qualify for the 20% notional tax credit.
Investment bonds can also be placed in trust to take them out of the IHT net on death.
While property investments will provide a stream of taxable income, you may consider equity release as an option to draw capital from such investment properties.