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ISA basics

Phone icon 5 minute read

Phone icon Last updated 9 December 2020

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Key points

  • An ISA is a savings 'wrapper' that allows investors to benefit from tax efficient growth on their savings
  • A stocks & shares ISA can hold a wide range of different investments
  • A ‘flexible’ stocks & shares ISA allows investors to withdraw funds and replace them in the same tax year without impacting the standard subscription limit
  • Investments in the ISA are free from capital gains tax and most income is also tax free
  • In the event of death the ISA will form part of the estate for IHT purposes 

1. What is an ISA?

An Individual Savings Account (ISA) is a tax-efficient savings product. It is effectively a tax wrapper that can be put around a wide range of different investments. 

An ISA is a great way to save for the long-term and protect any profits or interest earned from tax. For investors, returns from ISA savings are free of UK income tax and capital gains tax. 

2. Who can invest in an ISA?

To be eligible for a stocks & shares ISA an investor must be an individual aged 18 or over.

The subscriber should be resident in the UK or, if not, be performing duties as a Crown employee serving overseas and paid out of the public revenue of the UK (typically a serving member of the armed forces, or a diplomat), or be married to, or in a civil partnership with, such a person (the residence qualification). 

Non-resident investors can make additional permitted subscriptions and flexible ISA replacement subscriptions.

3. What investments are held in a stocks and shares ISA?

Many different types of investment can be held in a ISA, including:

  • Insurance policies
  • Unit trusts
  • Investment trusts
  • Exchange-traded funds
  • Individual stocks and shares
  • Corporate and government bonds
  • OEICs (an open ended company). 

4. The ISAs structure

The investor must be named as the beneficial owner of the underlying assets with the legal title remaining with the ISA manager or the ISA manager’s nominee, or jointly with the investor and either the ISA manager or the ISA manager’s nominee. 

It is not possible to transfer the beneficial ownership of the ISA so it cannot be assigned into trust or gifted.  

5. Annual subscriptions

From 6 April 2017 investors can subscribe in each tax year to:

  • one cash ISA 
  • one stocks and shares ISA 
  • one innovative finance ISA
  • one Lifetime ISA 

A total of £20,000 can be paid into a stocks & shares ISA in the current tax year (2020/21). The whole allowance of £20,000 can be paid into, for example, a stocks and shares ISA, a cash ISA, an innovative finance ISA or a combination of these as the investor chooses. However, it is important to note that you can put money into only one of each kind of ISA in each tax year.  

From April 2017 it is also possible to subscribe £4,000 to a lifetime ISA. If an individual does subscribe the maximum amount to a lifetime ISA they will only be eligible to pay £16,000 into another type of ISA. 

An individual’s yearly allowance expires at the end of the tax year and any unused allowance will be lost. It cannot be rolled over to the following tax year. 

6. What is the tax treatment?

Any increase in value of the investments in a stocks and shares ISA is free of capital gains tax (CGT). Most income is tax-free as well. Also, any profit made when selling investments in a stocks and shares ISA is free of CGT. Income and capital gains arising in an ISA do not have to be entered on a tax return and funds can be removed from it at any time without a tax penalty. 

Consequently, investments that pay interest (for example, government bonds and corporate bonds), or rental income (such as some property funds) provide 100% tax-free income if held within an ISA. 

Dividend income from stocks and shares ISAs is not counted towards an individual’s tax-free dividend allowance, currently £2,000 per year. Dividends are taxed at 10% at source and this cannot be reclaimed by the ISA Manager. 

7. Withdrawing money

Money can be withdrawn from a stocks & shares ISA at any time, without losing any tax benefits. Where an ISA is 'flexible' cash can be withdrawn and then reinvested during the same tax year up to the amount withdrawn without reducing the current year’s allowance. 

An example

The allowance is £20,000 and your client put £10,000 into an ISA during the tax year. £3,000 is then withdrawn. The amount that can still be invested during the same tax year is now £13,000 (the remaining allowance of £10,000 plus the £3,000 withdrawn).

8. Transferring an ISA

All ISA providers have to allow transfers out, but they aren’t required to offer transfers in (and many ISAs don’t). 

It is possible to transfer an ISA from one provider to another at any time. And it is possible to transfer savings to a different type of ISA or the same type of ISA. To be able to transfer money invested in an ISA during the current year, all of it must be transferred. For money invested in previous years, it is possible to choose to transfer all or part of the savings. 

9. ISAs on death

The ISA will end when either:

  1. A personal representative closes it; or
  2. The administration of an individual’s estate is completed. 

Otherwise, the ISA provider will close an ISA three years and one day after death. 
There will be no income tax or CGT to pay up to that date but ISA investments will form part of an estate for inheritance tax (IHT) purposes. 

On the death of a spouse or civil partner, the survivor can inherit their ISA allowance. This means that as well as their own ISA allowance, a surviving spouse or civil partner can add a tax-free amount up to either:

  • The value of investments held in their ISA when they died; or 
  • The value of their ISA when it is closed. 

If the spouse or civil partner died between 3 December 2014 and 5 April 2018, their ISA would have ended on the date of their death. 

Important Information

The information provided is based on our current understanding of the UK legislation and may be subject to amendments as a result of changes in legislation.

All references to taxation are based on our understanding of current UK taxation law and may be affected by future changes in legislation, the individual circumstances of the investor and pension scheme conditions.

The information provided in this article is not intended to offer advice.

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