March 24, 2021

Article

Individual Savings Account (ISA) allows you to save tax-free into a cash savings or investment account. ISA accounts are offered by banks, building societies, insurers, asset managers and National Savings and Investments (NS&I). They’re popular because you don’t pay tax on:

  • interest earned on cash in an ISA
  • income or capital gains from investments in an ISA

If you complete a tax return, you do not need to declare any ISA interest, income or capital gains on it.

However on your death the value of your ISAs will be added to your other assets to work out if Inheritance Tax needs to be paid by your estate (unless the ISAs are invested in Business Relief qualifying investments and held for the minimum 2 year qualifying period). If your spouse or civil partner dies you can inherit their ISA allowance – this is as well as your normal ISA allowance, so in addition you can then add a further tax-free amount up to either:

  • the value they held in their ISA when they died
  • the value of their ISA when it’s closed

How ISAs work - there are 5 types:

  • Cash ISA - savings in bank & building society account, some National Savings & Investment products
  • Stocks and shares ISA – shares in companies, unit trusts & investment funds, corporate bonds & government bonds
  • Innovative finance ISA – peer-to peer loans i.e. loans that you give to other people or businesses without using a bank, crowdfunding debentures i.e. investing in a business by buying its debt.
  • Lifetime ISA – cash, stocks and shares.
  • Junior ISA – cash, stocks and shares, until child’s 18th

Putting money into an ISA

  • Every tax year you can put money into one of each kind of ISA. The tax year runs from 6 April to 5 April.
  • You can save up to £20,000 in one type of account or split the allowance across some or all of the other types. You can only pay £4,000 into your Lifetime ISA and £9,000 in a Junior ISA in a tax year.
  • So for example you could save £11,000 in a cash ISA, £2,000 in a stocks and shares ISA, £3,000 in an innovative finance ISA and £4,000 in a Lifetime ISA in one tax year.
  • You’ll keep your savings on a tax-free basis for as long as you keep the money in your ISA accounts.

It’s possible to transfer any non-ISA shares you already own into an ISA - but only if they’re from an employee share scheme. You cannot transfer any peer-to-peer loans you’ve already made or crowdfunding debentures you already hold into an innovative finance ISA.

Withdrawing your money

You can take your money out of an Individual Savings Account (ISA) at any time, without losing any tax benefits but first check the terms of your ISA to see if there are any rules or charges for making withdrawals. There are different rules for taking your money out of a Lifetime ISA.

If your ISA is ‘flexible’, you can take out cash then put it back in during the same tax year without reducing your current year’s allowance. Your provider can tell you if your ISA is flexible.

Example Your allowance is £20,000 and you put £10,000 into an ISA during the 2020 to 2021 tax year. You then take out £3,000.

The amount you can now put in during the same tax year is:

  • £13,000 if your ISA is flexible (the remaining allowance of £10,000 plus the £3,000 you took out)
  • £10,000 if your ISA is not flexible (just the remaining allowance)

Transferring your ISA

  • You can transfer from one provider to another at any time - useful if the rate on your cash ISA account has reduced.
  • You can transfer your savings to a different type of ISA or to the same type of ISA.
  • If you want to transfer money you’ve invested in an ISA during the current year, you must transfer all of it.
  • For money you invested in previous years, you can choose to transfer all or part of your savings if the Provider allows this.
  • If you transfer cash and assets from a Lifetime ISA to a different ISA before the age of 60, you’ll have to pay a withdrawal fee of 25%.

Restrictions on what you can transfer

You can transfer cash from your innovative finance ISA to another provider - but you may not be able to transfer other investments from it. Check with your provider for any restrictions they may have on transferring ISAs. They may also make you pay a charge.

The value of your investments can fall as well as rise and is not guaranteed.

Please get in touch with our financial planning team should you require further advice and guidance.

*Albert Goodman Chartered Financial Planners is the trading style of Albert Goodman Financial Planning Ltd, which is authorised and regulated by the Financial Conduct Authority. The Financial Conduct Authority does not regulate inheritance tax planning.

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