Techzone

What is an ISA?

Individual Savings Accounts (ISAs) are a form of tax advantaged savings. There is no tax to pay on income and gains within the ISA and no tax on the saver when they access their money. ISA income and gains do not have to be entered on tax returns and do not count towards any of the income definitions that determine the personal allowance, pensions tapered annual allowance or child benefit tax charge.

Types of ISA

1. There is an overall contribution limit of £20,000 regardless of what types of ISA are chosen.  From 6 April 2024 the age for opening a new Cash ISA has increased from age 16 to age 18. This is consistent with the age requirement already in place for opening a Stocks and Shares ISA.
2. It is no longer possible to open a new Help to Buy ISA after 30 November 2019. Existing HTB savers are able to continue contributions until 30 November 2029.
3. This is increased to £3,400 in the first year only.
4. The Lifetime ISA must be opened before age 40. No further contributions are allowed after 50^th birthday.

Cash ISA

Cash ISAs will typically offer either:

• deposit accounts from banks and building societies, or
• certain National Savings & Investment products

Interest is tax free and may be fixed or variable rate. Some managers will offer flexible ISAs so the withdrawn cash can be replaced in the same tax year without affecting the contribution limit.

Stocks and shares ISA

The following are the main qualifying investments for a stocks and shares ISA:

• shares listed on a recognised stock exchange anywhere in the world (including AIM)
• corporate bonds
• gilts and similar securities issued by governments of EEA states
• oeics and unit trusts and similar (UCITS) funds issued elsewhere in the EU
• investment trusts
• exchange traded funds
• shares transferred from an HMRC approved SAYE share option scheme or Share Incentive Plan
• cash

All capital gains and income, whether dividend or interest, are tax free.

Help to Buy

This is a type of cash ISA designed to help first time house buyers. It is no longer be possible to open a new Help to Buy ISA after 30 November 2019 but existing HTB savers will be able to continue contributions until 30 November 2029.

There was a maximum of £1,200 which could be deposited in the first month of opening and then £200 per month thereafter.

The government will add a 25% bonus, up to a maximum of £3,000, where the funds are used towards the purchase of a first property. The saver will need to have paid in at least £12,000 to qualify for the maximum government bonus.

Lifetime (LISA)

This is another type of ISA designed to either help first time buyers get a foothold on the property ladder or provide a retirement fund from age 60. It has more generous savings limits than Help to Buy ISAs and can invest in either cash or stocks and shares. Like the Help to Buy ISA it has a 25% bonus but this is added annually rather than on property purchase.

Applicants must be aged between 18 and 39 to open a Lifetime ISA. Up to £4,000 can be saved each year but payments must stop once the applicant reaches age 50. The government will add a 25% bonus to savings, up to a maximum of £1,000 per year.

Money can be withdrawn penalty free from the LISA if any of the following criteria apply:

• funds are used to purchase a first home
• applicant is aged 60 or over
• applicant is terminally ill, with less than 12 months to live

There is a 25% charge applied to the value of withdrawals for any other reason. 

You can have a Help to Buy ISA and a Lifetime ISA, but only the bonus from one of them can be used towards buying a home.

Innovative finance

This is a very niche form of ISA that facilitates peer to peer lending and crowdfunding in an environment free of income tax and CGT.

Junior (JISA)

A JISA can be either be cash or stocks and shares but has a much lower contribution limit than adult ISAs. A child can only hold up to two JISAs (no more than one of each type) throughout their childhood.  Before 6 April 2024 a child could open an adult cash ISA from age 16. This was raised to age 18 from 6 April 2024.  It is possible to transfer a JISA to a new manager. Child Trust Funds can also be transferred to a JISA.

Parents or guardians with parental responsibility can open an account and manage the investments. The money does however belong to the child. Anyone, such as other family members and friends, can add funds to the JISA.

The child can take control of the account when they are 16, but cannot withdraw the money until they turn 18.

Child Trust Fund (CTF)

Child Trust Funds started to mature in September 2020 when the first children reached age 18. The amount in the matured CTF can be transferred into a Cash ISA or a Stocks and Shares ISA and will not count towards the overall limit in the tax year.  Child Trust Funds which are transferred into a Lifetime ISA will be subject to the Lifetime ISA limit.

Eligibility

In addition to the age limits stated above ISA investors must be individuals* who are:

• UK resident or
• Crown employees, or their spouse/civil partner, serving overseas

Non-UK resident investors cannot subscribe to an existing or new ISA. However, someone who becomes non-UK resident can retain any existing ISAs which will continue to be tax free in the UK. The non-resident investor is still able to:

• transfer their ISA to a new provider (although not all ISA managers will allow transfers in from non-residents)
• make withdrawals
• switch investments within the ISA

* ISAs are not available to trustees and cannot be gifted to trusts or individuals. Joint accounts are also not allowed.

Contributions

Contribution limits

There is an overall contribution limit which is £20,000 (£9,000 for junior ISAs) in 2024/25. There are also lower limits for lifetime and help to buy ISAs. You can save up to £20,000 in one type of account or split the allowance across some or all of the other types.

Removal of 'one' ISA of each type restriction

From 6 April 2024 savers are no longer restricted to one ISA of each type per tax year. This simplification will mean investors will be able to subscribe to multiple cash or stocks and shares ISA in a year without fear of invalidating their subscriptions.

ISA contributions made before 6 April 2024

The general rule was that you could not contribute to two ISAs of the same type. For example, it was not permitted to pay into two cash or two stocks & shares ISAs from different providers in the same tax year.

An exception to this is where investments are made into a LISA.  In this case, funds can be invested in a cash or stocks and shares LISA even if the investor has already contributed to a cash and/or stocks and shares ISA in the tax year.

The rules for Help to Buy ISAs are different. A Help to Buy ISA is classed as a cash ISA and investors cannot subscribe to a cash ISA if they have already subscribed to a Help to Buy ISA. Although some ISA managers offer a combined Cash and Help to Buy Portfolio ISA. However, any investor who has already subscribed to a cash ISA in the tax year could transfer £1,200 into their Help to Buy ISA, and transfer any remaining funds into another type of ISA.

Transferring existing shares as a contribution

Shares received from a company Share Investment Plan (SIP) or SAYE option plan can be transferred to a stocks and shares ISA (including a Lifetime ISA) as long as the ISA manager agrees to take them. 

The amount transferred counts towards the annual contribution limit. The transfer is free of CGT if it is made within 90 days from the date they leave the scheme.

It is generally not possible to transfer ordinary shares or collectives held into an ISA. These will need to be disposed of, and therefore subject to CGT, and the cash proceeds invested in an ISA.

Withdrawals

Money can be withdrawn from an ISA at any time without losing any tax benefits. However, there may be costs to withdrawing from a Lifetime ISA (LISA) or Help to Buy ISA.

An investor can withdraw money from a LISA if they are:

• buying their first home
• aged 60 or over
• terminally ill, with less than 12 months to live

Otherwise, there is a 25% government charge on withdrawals.

Flexible ISAs

A flexible ISA allows the investor to withdraw cash from their ISA then put it back in during the same tax year without counting towards the annual subscription limit.

Junior, Help to Buy and Lifetime ISAs cannot offer this facility. 

Managers are not obliged to offer flexible ISAs so investors should check before withdrawing cash that they subsequently hope to replace. If all the cash is withdrawn from an ISA, this would normally close the account. Clients should check that the ISA provider will allow the ISA to be reopened if they plan to use flexibility to replace the withdrawn funds.  

Withdrawals are first treated as coming from the current tax year's allowance.  If the withdrawal exceeds what has been put in this year, any surplus is treated as being from previous years.

When replacing flexible ISA withdrawals these must be paid back in the same tax year to the same ISA account, and will not be counted as new ISA subscriptions .

ISA transfers

Full or partial transfers

From  6 April 2024 it is possible to do partial transfers between ISAs, regardless of which tax year the subscriptions were made.  

Before 6 April 2024 there were separate rules for the transfer of current and previous years subscriptions. While it was possible to do a partial transfer of previous years subscriptions, transfers of current years subscriptions had to be for the whole amount including the attributable investment growth.  

Transferring between different types of ISA

Investors can transfer to the same type or a different type of ISA as they choose. There are no longer any restrictions on transferring between stocks and shares and cash ISAs.

Death of an ISA investor

Inheritance tax

ISA investments cannot be written in trust and will form part of the investor's estate for IHT. However, it's possible to invest in AIM shares via an ISA. AIM shares held within the ISA for two years may qualify for 100% Business Property Relief which would make them free of IHT.  From 6 April 2026 the IHT relief for AIM shares held in an ISA for two years will reduce to 50%.

If an ISA is inherited by a spouse or civil partner on death it will be covered by the spousal exemption. Therefore, there would be no IHT on first death but they will form part of the surviving spouse's estate and IHT may become due on the second death.

Income tax and CGT

The tax advantages of an ISA can continue after death when an investor died after 6 April 2018. No new monies can be paid into the ISA after death but growth and income will remain tax free whilst the administration of the estate is being completed.

The tax advantages can continue until the sooner of:

• the administration of the estate is complete or
• the ISA is closed or
• three years has elapsed since the date of death

Where death occurred on or before 6 April 2018, the associated tax benefits of an ISA ended on death. Consequently income and capital growth arising after death would be subject to income tax and CGT respectively.

Increased contribution limit for a surviving spouse (APS)

Following the death of their spouse or civil partner, an individual can make an increased contribution to their own ISA based on the value of the deceased's plan. This is known as an additional permitted subscription or APS and is in addition to the normal ISA subscription limit. The deceased and the surviving spouse or civil partner must have been living together at the date of death.

Additional permitted subscriptions:

• are available whether or not the surviving spouse or civil partner inherited the deceased's ISA assets
• can be made to the manager that held the deceased's ISA or another manager who agrees to accept the subscriptions
• are limited to the value of the deceased's ISA at their date of death if the investor died on or before 5 April 2018
• 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 if the investor died on or after 6 April 2018
• must be made within:
  
  • three years of the date of death, or
  • 180 days of the completion of the administration of the estate, if later
• can be made to a cash, stocks and shares, or an innovative finance ISA
• can also be made to a Lifetime ISA if the investor is resident in the UK, but will count towards the Lifetime ISA payment limit but not the annual overall ISA limit
• can be made in cash or inherited non-cash ISA assets
• can be made by non-residents
• count as previous year subscriptions for all other ISA purposes