ISA (Individual Savings Account): Your Questions Answered

Posted on March 14, 2020

There is a considerable amount of misunderstanding about Individual Savings Accounts, or ISAs for short, even among people who have them.

What’s an ISA?

The best way to picture an ISA is as a container designed to protect its contents from tax.

If you’re totally new to them then you can read our introduction to ISAs and a rundown of the different types here. If you already have some familiarity with ISAs, and which one(s) might be right for you depending on your individual circumstances, then read on for answers to the most common questions people have about them.

Can I have more than one ISA?

Yes you can, but you are only allowed one of each type. Everyone has an annual tax-free allowance, and you can invest yours into different types of ISAs. However, no matter how many ISAs you hold, your tax-free allowance is constant and depends on your individual circumstances: it is not affected by your choice of ISA.

How long do I have to wait to access equity in an ISA?

This will depend on the type. It is important to realise from the outset that ISAs are intended to be used as medium to long term investments.

If you think you might need to draw on your savings in a hurry then there are Variable Rate Cash ISAs which do not have a minimum period, so instant access is possible in a financial emergency. One step up on the ‘commitment ladder’ are Flexible ISAs, where you can take money out and replace during the same financial year without the deposit being counted as part of your annual allowance. Then there are Fixed Rate Cash ISAs, which will charge a fee to release money before term, but will usually offer a higher rate of interest to you in return for your commitment.

For the sake of balance, it’s worth mentioning that Stocks & Shares ISAs rarely have a minimum period – but you must remember that your investment is not in cash and will need to be converted back to it at the market rate and with any applicable fees paid.

If my ISA generates a dividend, is this taxable?

No: there is no tax on a dividend if it’s inside your ISA.

Do I pay Capital Gains Tax on any profit share from my ISA investments?

No: you are not deemed to be making a profit until you sell your investment (for more than you bought it for).

Can I transfer my ISA?

Yes. Do bear in mind that you may be charged a transfer fee. Also, whilst you can decide how much to transfer from older savings and investments, it is not possible to transfer part of any money you have invested in the current financial year – you must transfer it all or not at all.

What’s the situation regarding ISAs and inheritance?

In the event of a death, ISAs are – on the whole – not treated differently from any other part of the deceased’s estate. In the absence of a will, they are subject to normal intestacy rules. They cannot be transferred or held in trust, so they are subject to inheritance tax. However it’s not quite that simple, and there are two ‘post scripts’ to this general rule.

First, since August 2013 an ISA holding shares from the Alternative Investment Market (or ‘AIM’) which qualify for Business Property Relief would be eligible for 100% relief from inheritance tax.

Second, in the event of an ISA holder’s death, their spouse (or registered civil partner) does inherit the deceased’s ISA allowance on a single use basis: that is, for up to three years from the date of death, or 180 days from the settlement of the estate beyond the three year point. It should be noted that the ISA allowance and the equity held in any ISA(s) can be considered separately. So, even if the spouse or civil partner is not going to inherit the ISA itself they still inherit the allowance for one-time usage.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS, WHICH ARE SUBJECT TO CHANGE. THE TAX BENEFITS RELATING TO ISA INVESTMENTS MAY NOT BE MAINTAINED.

STOCKS & SHARES ISA INVESTMENTS DO NOT INCLUDE THE SAME SECURITY OF CAPITAL THAT IS AFFORDED WITH A CASH ISA. THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

No guarantee can be given that the information provided is accurate in the present or the future. It is not intended to constitute either a statement of applicable law or financial advice, and responsibility cannot be accepted for any subsequent loss following activity or inactivity by any individual or organisation. Indeed, such information should NOT be acted upon without first receiving appropriate and specific professional advice.