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  • Writer's pictureNewbold Wealth Management

ISA Fundamentals

Why you need to know

With a wide choice of investments that can underly an Individual Savings Account (ISA), and its tax efficiency, an ISA is often the first port of call for an investor, particularly for higher rate and additional rate taxpayers and those restricted as to the amount of tax-relievable pension contributions they can make or benefits they can accrue because of existing pension provision.


What you need to know

The ISA is basically a tax-free scheme for saving. For investors, the returns from ISA savings are free of UK income tax and capital gains tax. For this reason, income and capital gains do not have to be entered on a tax return and funds can be removed without a tax penalty.

With a maximum subscription of £20,000 per individual for tax year 2021/22, married couples/civil partners can currently jointly save £40,000 each tax year. If they saved this amount each year for ten years they would have a fund of almost £530,000 with fund growth at 5% compound per annum.


Legal fundamentals

  • Beneficial ownership of the underlying investments must be with the investor, with the legal title lying with the ISA manager or their nominee, or jointly with the investor and either the ISA manager or the ISA manager’s nominee.

  • Because beneficial ownership is with the investor they may enjoy the usual benefits of ownership, such as attending annual general meetings and receiving company accounts, but by arrangement with the ISA manager. Beneficial ownership cannot be transferred so an ISA cannot be gifted or assigned into trust, unlike a life assurance policy or an ordinary unit trust/OEIC holding.

  • The ISA manager claims all the available tax reliefs from HMRC on behalf of the investor.

  • The investor takes out an ISA by making a subscription to the ISA manager who makes and holds investments on behalf of the investor.

ISA administration

  • HMRC Savings Schemes Office (SSO) administers the ISA scheme.

  • Day-to-day management of an ISA must be in the hands of an ISA manager approved by the SSO.

  • The ISA manager claims all the available tax reliefs from HMRC on behalf of the investor.

  • The ISA manager holds the investments.

  • The investor may select the underlying investment themselves – called a self-select or non-discretionary ISA – or leave investment decisions to the ISA manager – a managed or discretionary ISA.

  • A cash ISA can be switched, in whole or in part, to a stocks and shares ISA and vice versa.

  • Money can be taken out of an ISA at any time. However, before 6 April 2016 any money that is put back into the ISA to replace the money withdrawn earlier will count as a new subscription. From 6 April 2016, a replacement subscription will not count towards the annual subscription limit if made in the same tax year as that in which the withdrawal was taken (provided that the ISA manager is able to administer this).

  • ISA managers can be changed at any time by asking the current ISA manager to make the transfer. The ISA manager may charge for this and sometimes the terms of an ISA mean that any transfer can only be made in cash which means any non-cash assets would need to be encashed before transfer.

  • It is important to note that any transfer must be made directly between the ISA managers. Otherwise, if the transfer is made via the investor it may be treated as a subscription which could well exceed the subscription allowance for that particular year. If an investor were to close one ISA and open a new one with a new ISA manager this would count as a new subscription.

Eligibility

To be eligible for an ISA, an individual must be:

  • Resident in the UK for tax purposes or a Crown employee working overseas (or the spouse/civil partner of such an employee). On ceasing to be UK resident, subscriptions must be stopped but any ISAs will remain in force and retain their tax benefits (although they may, of course, be subject to local taxation overseas).

  • Aged 18 or over, or aged 16 or over for a cash ISA.

  • A spouse/civil partner of a deceased ISA investor who can make an additional permitted subscription (APS), also known as a “surviving spouse” subscription. This additional permitted subscription is available even if the surviving spouse/civil partner did not actually inherit the deceased’s ISA funds.

Subscribing for an ISA

  • There is an annual tax year subscription limit for each individual. For tax year 2021/22 it is £20,000. Any unused subscription amount cannot be carried forward.

  • Subscriptions must be in cash, except where shares acquired under certain share option schemes are involved or where an additional permitted subscription (please see section on “eligibility” above) is possible.

  • Each tax year, an individual can invest in one of each type of ISA, or in one ISA. The amount invested in the different types of ISA can be split in any proportions (subject to any maximum subscriptions for specific types (e.g. Help to Buy ISA and Lifetime ISA (LISA)) but the total investment must not exceed the annual subscription limit.

ISA investments

There are four types of ISAs available:

  • Cash ISAs (including Help to Buy).

  • Stocks and shares ISAs.

  • Innovative finance ISAs.

  • LISAs.

The Help to Buy ISA, available from 1 December 2015, is a cash ISA for first-time house buyers (a maximum purchase price of £250,000 (£450,000 in London). The Help to Buy ISA has a maximum subscription limit of £2,400 p.a. The Government pays a bonus of 25% of the amount subscribed each year (to a maximum bonus of £3,000) where the proceeds are used to purchase a first property for up to £250,000 (£450,000 in London). A Help to Buy ISA can be transferred to a LISA (please see below). From 30 November 2019 it is no longer possible to open a Help to Buy ISA account, however it is possible to continue saving until 30 November 2029 and claim the Government bonus by 1 December 2030.


The LISA, available from 6 April 2017 has a maximum subscription limit of £4,000 in 2021/22. It is available for investors aged up to 39 and no further subscriptions can be paid once the investor reaches age 50. The Government adds a bonus of 25% of the amount subscribed each year, although this bonus and any associated growth is clawed back, with an additional penalty of 5%, if money is withdrawn before age 60, except for the purposes of buying a first house with a purchase price of up to £450,000. (The penalty was waived for those making withdrawals during the period 6 March 2020 to 5 April 2021). LISA subscriptions can be invested in cash or stocks and shares in any proportion. If an investor also holds a Help to Buy ISA, only one 25% Government bonus is payable – the investor can elect which account receives it.


The Innovative Finance ISA was introduced from 6 April 2016 and is designed to allow investors to lend all or some of their annual subscription allowance through peer to peer (P2P) lending schemes (also known as crowdlending). Note that the Treasury, HMRC and the FCA are currently carrying out a number of reviews into the appropriateness of the Innovative Finance ISA rules.

  • A cash ISA, stocks and shares ISA, LISA and Innovative Finance ISA can all be with the same or different providers.

  • A cash ISA can be switched, in whole or in part, to a stocks and shares ISA and vice versa.

  • Permitted investments for ISAs are prescribed in the ISA regulations.

  • For a stocks and shares ISA, the permitted investments include quoted stocks and shares, AIM shares, collectives, such as unit trusts and OEICs, and corporate bonds.

  • Permitted investments for a cash ISA include cash deposits and certain cash-based collectives.


Tax fundamentals

  • No UK tax on dividends in a stocks and shares ISA (although tax credits – that were applicable for years up to and including 2015/16 - could not be reclaimed). Tax credits were abolished with effect from 6 April 2016.

  • Interest is received free of UK tax in all ISAs.

  • There is no capital gains tax on profits.

  • ISA income and gains do not have to be reported on a tax return and are ignored for the High Income Child Benefit tax charge and Personal Allowance / Tapered Annual Allowance income threshold calculations.

  • ISA transfers can be made between the cash and stocks and shares components and vice versa, with no restrictions or tax implications.

  • AIM shares held in an ISA are subject to the normal inheritance tax (IHT) rules and can therefore qualify for 100% IHT business relief after two years of ownership.

Death of an ISA investor

On the death of an investor on or before 5 April 2018, income and capital gains which arose from the date of death ceased to be tax exempt.


For deaths on or after 6 April 2018, for all types of ISA except the Junior ISA, when the investor dies, their ISA becomes a ‘continuing account of a deceased investor’. No subscriptions, including replacement flexible subscriptions, can be made into a ‘continuing account of a deceased investor’. However, active management of the investments already held within the account may continue subject to the terms and conditions of the account. Funds held within a ‘continuing account of a deceased investor’ continue to benefit from ISA tax advantages. Any interest, dividends or gains in respect of investments in a ‘continuing account of a deceased investor’ are exempt from tax. Its status as a ‘continuing account of a deceased investor’ lasts until either the administration of the estate is complete, the ISA is closed, or the third anniversary of the death of the account investor, whichever is sooner.


If, after a period of three years, the administration of the account is ongoing and the account has not been closed, on the next working day following the third anniversary of the deceased’s death, the ISA manager must remove the ISA wrapper from the account and all subsequent income or gains will then become taxable in the hands of the estate.

Benefits can be paid out by the ISA manager in the form of:

  • Cash

  • The transfer of investment assets underlying the ISA to the deceased investor's estate

The value of an ISA at death will always form part of a deceased investor’s estate as an ISA cannot be gifted or assigned into trust so as to change legal ownership.


A surviving spouse/civil partner will be entitled to make an additional permitted subscription (please see section on “eligibility” above). For deaths on or before 5 April 2018, the allowance transferred to the surviving spouse/civil partner was equal to the value of the ISA on the date of death. However, for deaths on or after 6 April 2018, the APS can be either the value of the deceased’s ISA at their date of death or the point the ISA ceased to be a ‘continuing account of a deceased investor’, whichever is higher.


Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. The FCA does not regulate tax advice. This newsletter is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as at 09 April 2021 and the Finance Bill 2021. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.

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