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Stocks and Shares ISA Rules

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Before you invest in a Stocks and Shares ISA it is important to understand the rules that apply to the accounts.

Investment ISA rules are fairly simple once you get to grips with them, but they can be confusing at first because of the tax treatment of the accounts. As they are tax-free accounts, HMRC is strict on what you can and cannot do with Stocks and Shares ISAs, particularly with contributions and transfers.

If you break the rules on ISAs, you will likely have the relevant portion of your ISA account void and have to pay tax on any gains and dividends you have received on these investments.

This guide will help you understand what you can and cannot do, and it will help you get the most out of your Stocks and Shares ISA.

How much can I contribute to a Stocks and Shares ISA?

  • Adults have an annual allowance of £20,000 for the current 2021/22 tax year
  • The allowance refreshes each tax year, and is occasionally changed by HMRC
  • Your annual ISA allowance does not roll over each year – use it or lose it

Can I split my ISA allowance between different Stocks and Shares ISAs?

No, you cannot contribute to more than one Stocks and Shares ISA in the same tax year.

You can have more than one Stocks and Shares account open and invested, but you can only add money to one in each tax year.

You can contribute to a Stocks and Shares ISA and a Cash ISA in the same tax year as long as the total amount you contribute does not go over your annual allowance of £20,000.

For example, you could contribute £5,000 to a Cash ISA with NatWest and £15,000 to a Stocks and Shares ISA with HSBC in the same tax year.

Does an ISA transfer count towards my ISA allowance?

If you transfer an existing Stocks and Shares ISA or a Cash ISA into a new Stocks and Shares ISA, it will not be classed as a contribution or use up your annual ISA allowance.

Your new ISA provider will record how much you have contributed to your previous ISA in the current tax year and ensure that you do not go over the annual allowance with them.

What are the tax rules on a Stocks and Shares ISA?

All investments within a Stocks and Shares ISA are 100% tax-free:

  • Dividends – you do not have to pay dividend or income tax on the dividends you receive from your ISA investments. You do not even need to declare them on your tax return.
  • Capital Gains – you do not have to pay Capital Gains Tax (CGT) on the growth of your investments within an ISA.

What are the investment rules for a Stocks and Shares ISA?

Most of the investments you can hold in a general savings account are also allowed in Stocks and Shares ISA - here is a list of the most common ones:

  • Shares
  • Unit Trusts
  • OEICs (Open Ended Investment Companies)
  • Investment Trusts
  • ETFs (Exchange Traded Funds)
  • Index Tracker Funds
  • Bonds & Gilts
  • Overseas Stocks

Some investments cannot be held in an ISA, but these are fairly uncommon. If you are unsure, check on the investments’ Key Investor Information Document (KIID), or contact your ISA provider to ask.

What are the dividend rules for a Stocks and Shares ISA?

If you receive dividends from your Stocks and Shares ISA they will not leave your ISA wrapper unless you request for them to be paid out to your bank account.

This means that dividends do not count towards your annual ISA allowance, even if you opt to reinvest them automatically. Reinvesting your dividends automatically just means that they will go back into the fund or share that they have been paid from, and they will never actually leave your ISA account.

If your dividends are paid to your bank account and you then pay them back into your ISA, this will count as a contribution to your Stocks and Shares ISA.

What are the rules for withdrawing from your Stocks and Shares ISA?

You can withdraw as much as you want from a Stocks and Shares ISA at any time. You will need to sell down your ISA investments first, and then withdraw the proceeds to your bank account.

With a standard ISA, any money you withdraw will lose its ISA status so if you put it back in, it will count towards your ISA allowance. When you withdraw from an ISA you usually need to agree to a declaration confirming you understand this.

A Flexible ISA or Flexi-ISA, however, will allow you to re-contribute these funds in the same tax year without it affecting your ISA allowance.

What are the rules of a Flexi-ISA?

A Flexi-ISA allows you to withdraw and then contribute the same funds to your ISA account in the same tax year without it being deducted from your annual allowance.

For example, if you contribute £20,000 in May but need to withdraw £15,000 in August, you are allowed to put that £15,000 back later in the tax year without affecting your allowance. With a standard ISA, this would not be possible as you would have contributed a total of £35,000 to your Stock and Shares ISA in one tax year.

You can check with your ISA provider if your account is a Flexi-ISA.

What are the Stocks and Shares ISA transfer rules?

You can transfer an old Stocks and Shares ISA to a new one by completing a transfer form with your new provider.

You can also transfer Cash ISAs to a Stocks and Shares ISA, or vice versa, and the transfer value will not count towards your annual contribution allowance.

Usually, the easiest way to transfer your ISA will be as cash. This means that your investments are sold down, the cash sent to your new provider, and then reinvested on the other side.

However, you can also opt to transfer a Stocks and Shares ISA in-specie which will mean that your investments are not sold while they are transferring. Your ISA provider will re-register your investments under their name and will not sell them, meaning that you will not miss out on any market movements while your ISA transfers.

This type of transfer usually takes longer and costs more in charges from your previous provider, so it is worth checking the fees that will apply and weighing up if an in-specie transfer is worth it.

Can I transfer non-ISA investments into an ISA?

If you have investments in a general investment account (GIA) and want to hold them in a Stocks and Shares ISA instead, it is against the rules to transfer them in directly.

This is because HMRC needs to record your ISA contributions as a cash amount so that they can track how much you have invested. As an investment’s price fluctuates, they would not be able to record this correctly.

Therefore, you need to sell your investments first, contribute the funds to a Stocks and Shares ISA, and then buy the shares back in your ISA.

The most efficient and cost-effective way of doing this is via a Bed and ISA.

How does a Bed & ISA work?

You can instruct your ISA provider to move your non-ISA investments into your Stocks and Shares ISA via a Bed & ISA.

You need to hold the unwrapped investments in a general investment account (GIA) with your ISA provider before they can be moved into the ISA wrapper.

Your provider will sell your investments for you and repurchase them within your Stocks and Shares ISA almost instantly to avoid missing out on any market movements.

If you do this without using the Bed & ISA feature, then you need to wait 2-5 working days for your first sale to settle before you can move the proceeds into an ISA account to buy them back.

Key Bed and ISA rules and points:

  • You are usually charged for both the sale and repurchase of the investment(s)
  • Selling your investment(s) will crystalise any gains they hold meaning that you could be subject to Capital Gains Tax at this point
  • Your ISA contribution amount will be the value of the proceeds from your investment sale (minus any fees) that is then contributed to your ISA to re-purchase the investments
  • This contribution is deducted from your annual ISA allowance as usual
  • If you have an investment worth over £20,000 that you want to Bed & ISA, you can choose to do up to £20,000 of its value without needing to sell all of it
  • You can then repeat this process each tax year to eventually fully wrap the investment in your Stocks and Shares ISA

What happens to my ISA when I die?

There are two main investment ISA rules that you need to be aware of in the event of an ISA owner’s death.

Inheritance Tax

ISAs are not immune from inheritance tax (IHT) as they are from income and capital gains tax.

This means that when you die, your ISA account is added to the value of your taxable estate like any other investment would.

The current IHT allowance threshold is £325,000, so the value of your taxable estate needs to be lower than this to avoid paying IHT. Your Stocks and Shares ISA will form part of this taxable estate.

Additional Permitted Subscriptions (APS)

Since 2014, HMRC now allows individuals who inherit their spouse or civil partner’s ISA account(s) to gain an additional permitted subscription so that they can invest the full value into their own ISA account.

The value of the additional permitted subscription is equal to the value of the deceased’s ISA. An APS is valid for whichever time period is greater out of:

  • Three years after the date of death
  • 180 days after the administration of the estate is complete

For example, if you inherit your partner’s ISA worth £100,000 you can contribute an additional £100,000 to your own ISA using your APS. This is on top of your standard personal allowance of £20,000.

This means that the Stocks and Shares ISA you inherit can still benefit from the tax benefits of an ISA wrapper for the future.

What should I do if I have broken the Stocks and Shares ISA rules?

If you have broken an ISA rule then the best course of action is to notify HMRC and your ISA provider.

Do not try to rectify the error yourself by withdrawing or transferring funds, as this will likely complicate matters further and you could lose a portion of your actual ISA allowance.

For example, if you contribute to two different Stocks and Shares ISAs in the same tax year, notify each provider and HMRC.

FAQs

Can I lose my money in a Stocks and Shares ISA?

You can both gain and lose and money in a Stocks and Shares ISA.

How do I invest in a Stocks and Shares ISA?

You can invest in a Stocks and Shares ISA by opening an account online, over the telephone or by post.

You will need to make a contribution to open your account, either via Direct Debit or a debit card payment.

How do I withdraw money from a Stocks and Shares ISA?

You can withdraw online, by phone or by post. You will need to sell your investments first and you may be charged a dealing fee to do this.

How much money can I withdraw from a Stocks and Shares ISA?

There is no limit to how much you can withdraw from your Stocks and Shares ISA, but the funds you withdraw will lose their ISA status. You may be charged an account closure fee if you withdraw everything.

Will I have to pay tax when withdrawing from a Stocks and Shares ISA?

You will never need to pay income or capital gains tax when you withdraw from a Stocks and Shares ISA.

How much money can I put in a Stocks and Shares ISA?

You can add £20,000 for the current tax year, and this amount refreshes each tax year.

When does the ISA tax year run to?

The annual ISA allowance runs in line with the normal tax year, which is 6th April to 5th April the following year. Your ISA allowance will refresh on 6th April each year.

Does a Stocks and Shares ISA cost money?

You will be charged an annual management charge from your investment ISA provider, and you may also need to pay ad hoc administration and dealing charges.

The funds you invest in may also charge an annual fee. 

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Important Risk Information:

The value of investments can go down in value as well as up, so you could get back less than you invest. It is therefore important that you understand the risks and commitments. This website aims to provide information to help you make your own informed decisions. It does not provide personal advice based on your circumstances. If you are unsure of how suitable an investment is for you, please seek personal advice.

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