ISA RULES: Investing in an Individual Savings Account (ISA) is a tax-free method of saving money in the United Kingdom.
The current ISA allowance for the 2022 to 2023 tax year is £20,000. That is the maximum amount you can save in ISAs. There are four (4) popular types of Individual Savings Accounts:
- Cash ISAs investments
- Innovative finance ISAs
- Lifetime ISAs
- Stocks and shares ISAs
ISA rules allow you to put an amount of money into any one of the different kinds of ISA every tax year. The UK tax year begins April 6th and runs through to the following April 5th.
Who is Eligible to Open an ISA?
There are a few basic eligibility rules for opening an Individual Savings Account in the UK. To qualify you must be:
- At least 16 years of age to open a cash ISA.
- At least 18 years of age for an ‘innovative finance’ or a ‘stocks and shares’ ISA.
- Between 18 and 40 for the Lifetime ISA.
- A resident and living in the United Kingdom.
- A Crown servant or their spousal or civil partner if you are not living in the UK (e.g. on diplomatic or overseas civil service).
Note: There is a valid reason for calling them ‘individual’ savings accounts. You cannot hold an ISA with another person (joint) or on behalf of anyone else. But, you can open a Junior ISA for children who are under 18 years old.
How Individual Savings Accounts Work
Most novices, and experienced savers, will find ISAs a good place to start saving or investing. One big advantage is that tax is not due on:
- The interest on the cash saved in an ISA.
- The income or the capital gains made from investments in an ISA.
Note: There is no need to declare ISA interest, income, or capital gains on it, even if you file a tax return with HMRC.
Putting Money into ISAs Investments
Each tax year (April 6 to April 5) you can put money into all the different types of ISA. Thus, you can either save up to £20,000 in one account or you can divide the allowance across some (or all) of the others.
But, the maximum amount you can pay into a Lifetime ISA (LISA) in a single tax year is £4,000.
ISA Example 1: You could choose to save £16,000 in a cash ISA, £3,000 in a stocks and shares ISA and £1,000 in an innovative finance ISA in one tax year.
ISA Example 2: You could choose to save £9,000 in a cash ISA, £3,000 in a stocks and shares ISA, £4,000 in an innovative finance ISA and £4,000 in a Lifetime ISA in one tax year.
Investment ISAs do not close at the end of the tax year. So, keeping the money in the ISA accounts means the savings would continue on a tax-free basis.
What the different Types of ISA can Include
Stocks and shares ISAs can include:
- Corporate bonds
- Government bonds
- Shares in companies
- Unit trusts and investment funds
Note: The only type of non-ISA shares you can transfer to an ISA are those already owned in an employee share scheme.
Cash ISAs investments can include:
- Savings in bank and in building society accounts
- Selected National Savings and Investments products
Lifetime ISAs investments may include either:
- Stocks and shares
Innovative finance ISAs include:
- Crowdfunding debentures (buying debt from a business as an investment)
- Peer-to-peer loans (loans given to other businesses or people without using a bank)
Note: You cannot transfer peer-to-peer loans already made, or crowdfunding debentures already held, into an innovative finance ISA.
You can phone HM Revenue and Customs to get help with any general enquiries and the tax rules for Individual Savings Accounts.
How to Open an Individual Savings Account
There are several ways to get an Individual Savings Account (ISA) including:
- Banks and building societies
- Credit unions
- Crowdfunding companies
- Friendly societies
- Other financial institutions
- Peer-to-peer lending services
- Stock brokers
You can contact any of these providers to get more information from them. Each provider will inform you how to open an ISA with them.
Withdrawing Money from an ISA
You do not lose tax benefits when you take money out of your Individual Savings Account. Even though you can withdraw money at any time, there may be some charges incurred for taking out your money. The terms and ISA rules for your particular account will confirm this.
Notes: Different withdrawal rules apply when taking money out of a Lifetime Individual Savings Account.
Many of the investment ISAs are ‘flexible’. That means you can take out cash and then put it back in during the same tax year. Doing so would not reduce the ISA allowance for the current year. Check with your ISA provider to confirm whether yours is the flexible type.
Example from Flexible ISA Providers
ISA Example: The annual allowance is £20,000 and you decide to put £12,000 into an ISA during the current tax year. Later in the year you withdraw £4,000.
Thus, the amount allowed to put back in during the same tax year would be:
£12,000 if it is a flexible ISA (the remaining allowance of £8,000 plus the £4,000 taken out).
£8,000 if it is not a flexible ISA (only the remaining allowance).
Rules for Transferring ISAs
There are no restrictions on transferring Individual Savings Accounts from one provider to another (at any time). You can also transfer savings either to a different type of ISA or to the same type of ISA.
But, you must transfer all the money when transferring the current year’s investment. Money invested in previous years can either get transferred as a part of the savings or as the total amount.
Note: Different rules apply when transferring cash and assets from a ‘Lifetime ISA’ to a different type of ISA. There would be a withdrawal fee of 25% if you make the transfer before the age of 60.
ISA Transfer Restrictions
There are no transfer restrictions on moving cash from an innovative finance ISA to a different provider. But, they may restrict the transference of other types of investments from it. Your ISA provider can confirm any restrictions in place and how much they may charge for ISA transfers.
How to Transfer an Individual Savings Account
You should contact the ISA provider you want to move yours to before switching providers. They will get you to fill out an ISA transfer form to move the account.
Note: You should not withdraw money without filling in the transfer form. Doing so means you will be unable to reinvest that part of the tax-free allowance again.
ISA Transfer Deadlines and Complaints
As a rule, when you transfer Individual Savings Accounts it should take no longer than:
- Fifteen (15) working days for cash ISAs and cash Lifetime ISAs.
- Thirty (30) working days for stocks and shares ISAs, investments held in innovative finance ISAs, and stocks and shares in Lifetime ISAs.
Contact the account provider if a transfer takes longer than the specified time. The Financial Ombudsman Service deals with most irregularities and matters of complaints.
ISA Rules If You Move Abroad (or die)
After Moving Abroad
Opening an Individual Savings Account in the United Kingdom, and then moving overseas, means you cannot put money into it after the tax year when you moved. An exception applies to a Crown employee working abroad (or their spouse or civil partner).
Even so, you can keep the ISA open. You would still get UK tax relief on any money and investments held in the account. As a rule, you can pay more money into the ISA if you become a UK resident again (subject to the rules of the annual ISA allowance).
Note: As soon as you stop being a resident in the United Kingdom you must inform your ISA provider.
If You Die
An ISA would end on the date of the policy holder’s death. No Capital Gains Tax or Income Tax would be liable up to the date of the death. But, ISA investments form part of your estate for Inheritance Tax purposes.
Thus, UK law on wills and probate would instruct the ISA provider to sell off the investments and then either:
- Pay the proceeds of the sale to the administrator or to the beneficiary named in the estate.
- Transfer the investments directly to the administrator or beneficiary.
Note: The terms and conditions of each individual ISA has further details on what happens after the death of a policy holder.
If Your Spouse Dies (or civil partner)
You can inherit the ISA allowance of your spouse or civil partner if they died on or after the 3rd of December in 2014. That means you can add an extra tax-free amount up to the value held in their ISA at the time they died. Contact your ISA provider for further details and clarification.