With a few types of ISAs available, it’s important to understand the rules that govern them. Here we look at some of the ISA rules and what they could mean for you.
Last Updated: 6 April 2023
ISAs have benefitted many people in the UK for different reasons.
One of the reasons they are attractive to savers and investors is the tax benefits they bring. But with different types of ISAs and various providers available , it’s important to understand the rules that govern them.
In this article, we look at some of these rules and what they could mean for you.
This article is not personal advice. If you're not sure about what to do, please ask for advice. Unlike the security offered by cash, all investments can go up and down in value, so you may get back less than you put in. Tax rules can change, and benefits depend on your circumstances.
What types of ISA are there?
As an adult, there are four types of ISA that you may be able to pay into. These four ISAs are:
If you qualify, you can pay into one of each of these types of ISA in each tax year, provided you don't go over your total £20,000 allowance.
This means you can split your ISA allowance between these four accounts. The rules around a Lifetime ISA are a bit different, for example, you can only put up to £4,000 per year in a Lifetime ISA. This £4,000 counts towards your overall ISA allowance.
It's also possible to pay up to £9,000 into a Junior ISA for a child.
What are some of the tax rules and benefits of each ISA?
ISAs are a great option to help shelter your money from UK tax if you're happy with the risks. Once you pay money into an ISA, it's then sheltered from UK income and capital gains tax.
Stocks and Shares ISA rules
- You can only pay into one Stocks and Shares ISA per tax year.
- This tax year, you can put up to £20,000 in a Stocks and Shares ISA.
- You can open a Stocks and Shares ISA from age 18.
Lifetime ISA rules
- You can only pay into one Lifetime ISA per tax year.
- This tax year, you can put up to £4,000 in a Lifetime ISA. This counts towards your overall ISA allowance.
- You can open a Lifetime ISA between the ages of 18-39, you cannot normally open one after you turn 40.
- You can continue to pay into a Lifetime ISA until your 50th birthday.
- You can withdraw money from a Lifetime ISA without incurring a charge for an eligible house purchase or after you turn 60. Other withdrawals will usually mean a 25% government withdrawal charge, so you could get back less than you put in.
- For a house purchase to be eligible, you must be a first-time buyer, the property needs to be in the UK and cost £450,000 or less. It must also be your main residence. The Lifetime ISA has to have been open for at least 12 months before it can be used for an eligible home purchase.
- The home also needs to be bought using a mortgage or any other regulated home purchase plan.
- If you want to withdraw money from your Lifetime ISA before age 60 but not for an eligible house purchase, you can. But there is normally a 25% government withdrawal charge for doing so. The charge applies to the total value of the withdrawal, which could include any profits or interest you have made on your investments or savings.
Junior ISA rules
- An eligible parent or guardian can open a Junior ISA for a child.
- The child must be UK resident when the account is opened, but money can continue to be paid into it even if they move overseas.
- You can only open one of each type of Junior ISA per child. This means a child can have a Cash Junior ISA and a Stocks and Shares Junior ISA.
- This tax year, you can put up to £9,000 into Junior ISAs. You cannot open a Junior ISA if the child has a Child Trust Fund (CTF) open, the CTF must be transferred to a Junior ISA first.
- Money cannot usually be withdrawn from a Junior ISA before the child turns 18. Once the child turns 18, they are free to access the money as they wish.
Cash ISA rules
- You can only pay into one Cash ISA per tax year.
- This tax year, you can put up to £20,000 in a Cash ISA.
- You can open a Cash ISA from age 16 (you need to be 18 to open an HL Cash ISA).
Innovative Finance ISA rules
- You can pay into one Innovative Finance ISA per tax year.
- This tax year, you can put up to £20,000 in an Innovative Finance ISA.
- An Innovative Finance ISA gives you access to peer-to-peer lending and crowdfunding.
- You can open one from age 18 (HL does not offer an Innovative Finance ISA currently).
What investments can I hold in an ISA?
What you can hold in an ISA depends on the type of ISA you have. You may be able to hold cash and/or investments. The investments offered will depend on the provider.
Investments you can hold in a Stocks and Shares ISA, Junior Stocks and Shares ISA or Lifetime ISA may include:
- Exchange Traded Funds (ETFs)
- Investment trusts
If your spouse or civil partner has funds in ISAs when they die you can normally apply for an additional allowance, known as the Additional Permitted Subscription (APS). The value of the additional allowance will, for deaths after 5 April 2018, normally be the higher of:
- The value of the deceased's ISAs as at the date of death: and
- The value of the ISAs on the date they cease to be 'continuing ISAs'
An ISA will be a 'continuing ISA' until the earliest of:
- the completion of the administration of the estate
- the 3rd anniversary of the date of death
- or the closure of the ISA
ISAs will form part of your estate for Inheritance Tax purposes.
- You can transfer your ISA from one provider to another whenever you want. A transfer won't count towards your annual ISA allowance of £20,000.
- If you are transferring money paid into an ISA during the current tax year, you must transfer it in full.
- If you are transferring money paid in during previous years, you can transfer all or part of it.
- If you transfer from a Lifetime ISA to a different type of ISA before turning 60, you'll normally have to pay a government withdrawal charge of 25% on the amount transferred.
- If you are transferring to a Lifetime ISA from a different type of ISA, you may only transfer up to £4,000 depending on your remaining Lifetime ISA allowance. This type of transfer won't count towards the overall ISA allowance of £20,000 but it will count towards the LISA allowance of £4,000.
Make sure you check with your provider before you start a transfer. They may have exit fees and you may lose guarantees or benefits by transferring.
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