An ISA is the bread and butter of tax-efficient financial planning. The concept of an ISA is simple, but it has many quirks that are often misunderstood. Let's look at some common questions.
Can I have more than one ISA?
Yes, you can have more than one ISA. But you can only pay into one ISA type each tax year. There are 4 types of ISA; Cash, Stocks and Shares, Lifetime and Innovative.
So if you hold of these ISAs, that’s 4 ISAs you can pay in to each tax year. Your £20,000 ISA annual allowance is for all ISA contributions, not per ISA. The Lifetime ISA has a maximum contribution of £4,000 a year.
All other ISAs have a cumulative £20,000 maximum contribution limit per tax year.
Can you have a joint ISA?
No, you can’t have a joint ISA. ISA stands for Individual Savings Account. A couple will have a £40,000 annual allowance (£20,000 each) between them if they each have an ISA.
This can be beneficial if one of you has reached their £20,000 limit sooner than your partner. You may then want your partner to top up their ISA with your money.
Transferring shares into an ISA
Transferring shares into an ISA is known as ‘Bed and ISA’. This involves moving shares from a general investment account into an ISA. Doing this will use up some/all of your £20,000 annual allowance for ISA contributions.
Another option is called a ‘Bed and Spouse’. This is where you sell the investments in your general investment account (it could also be a joint investment account) and effectively transfer them to your spouse who can hold them in their ISA.
The main advantage of transferring shares into an ISA is moving them from a taxable account to a tax-free account.
Risks of transferring shares into an ISA
You may need to pay exit charges or entry charges during the transfer process. The impact of these charges is quite small and is outweighed by the future benefits of holding the funds in a tax-exempt environment.
When selling investments in your general investment account, you could be subject to Capital Gains Tax. You have a capital gains allowance – tax-free gains when selling investments - of £6,000 for the 2023/24 tax year.
Although most funds will trade daily, some may take 3 to 4 days to settle. As a result, you will be out of the market between these transactions. If investment markets rise during this short time you will lose some investment growth, conversely if they fall you will benefit.
The risk of a significant and negative market movement whilst these transactions are pending is small but should be highlighted. That said, market timing rarely works and you should be wary of trying to transfer shares into an ISA to benefit from a market movement.
Does transferring an ISA count as opening a new one?
Transferring one ISA to another ISA does not count as opening a new one. You can also open a new ISA and fund it with a transfer from another ISA, as long as you don’t pay in additional new money. The main thing to remember is that you only open and pay (subscribe) into one of each type of the 4 ISAs per tax year.
Let’s look at an example:
Dave has two cash ISAs with £10,000 in each. He is not happy with the interest rate on one of the ISAs and wants to transfer it to another ISA.
He can open a new ISA and transfer the £10,000 into it from the old ISA. He can choose to then add more money to his new ISA or pay money into the other ISA he still has. But he can’t pay into two cash ISAs in the same tax year.
When moving money from one ISA to another, always make sure you do it as a transfer. Do not withdraw money from an ISA into your bank account and then pay it back into another ISA.
Can I partially transfer an ISA?
Yes, you can partially transfer ISAs held from previous tax years. But there may be a minimum amount you need to transfer. So check with the new ISA provider. If you want to transfer money paid into an ISA during the current tax year, you must transfer all of it as no partial transfers are allowed.
When is the best time to transfer an ISA?
You can transfer any ISA at any time. ISA transfers do not count as new contributions, so you don’t need to worry about tax year dates to ensure you don’t go over the annual allowance.
The one exception is transferring a Lifetime ISA (LISA) or Help to Buy ISA (the previous version of the Lifetime ISA). This does count towards your annual LISA allowance of £4,000. So be aware of tax year dates. If you’re thinking of transferring a LISA and it’s getting towards the end of the tax year, it may be best to transfer it then. If you do it at the start of the tax year, you will quickly reduce your annual allowance for brand new contributions.
Example:
Joe has an existing Lifetime ISA with £4,000 in it. He wants to transfer to a new Lifetime ISA.
If he transfers it on April 5th, he uses up his £4,000 Lifetime ISA annual allowance. On April 6th, he gets a new annual £4,000 allowance and can put more money into it.
However, if he transfers the Lifetime ISA on April 6th, he uses up his £4,000 annual allowance on day 1 of the tax year. He can’t add anymore money for a whole year.
So, it is best for Joe transfer it before the new tax year starts.#
From a personal point of view, if you are relying on taking money out of your ISA, make sure you have other savings somewhere else. ISA transfers can sometimes take longer than expected so it may not be best to transfer an ISA if you are relying on taking the money out very soon.
Can I transfer a fixed rate ISA before maturity?
Yes, but you may need to pay a penalty fee. Under ISA rules, you are entitled to access the money in your ISA at anytime, even if you've locked in a fixed rate. This means that if you have a fixed rate ISA and you want to transfer it before maturity, your ISA provider must let you, The penalty fee is typically a forfeit of a period of interest - between 60 and 120 days. So factor this in if you're thinking about transferring an ISA before maturity.
Do I pay tax on ISA withdrawals?
No, you pay no tax on ISA withdrawals. That means no income tax, dividend tax, savings tax or capital gains tax. ISAs are a very popular savings product because of their tax-free status. Growth of the funds is not taxed. Withdrawals are not taxed.
The only exception to this is inheritance tax. ISAs form part of your estate and could mean inheritance tax is due when your estate is passed on to your loved ones.
Do reinvested dividends count as ISA contributions?
No, reinvested dividends do not count as ISA contributions. Any growth within an ISA, which includes reinvested dividends, is not classed as contributions. This is because it’s effectively interest earned on contributions. Reinvested dividends are not new money paid into an ISA.
