ISA Fundamentals

13 Jan 25

A new year offers a chance to spring clean your finances and prepare for the year ahead. As one of the most popular savings choices for investors, below is all you need to know about opening an ISA account.

Why you need to know

With a wide choice of investments that can underly an Individual Savings Account (ISA), and its tax efficiency, an ISA is often the first port of call for an investor, particularly for higher rate and additional rate taxpayers and those restricted as to the amount of tax-relievable pension contributions they can make or benefits they can accrue because of existing pension provision.

What you need to know

The ISA is basically a tax-free scheme for saving. For investors, the returns from ISA savings are free of UK income tax and capital gains tax. For this reason, income and capital gains do not have to be entered on a tax return and funds can be removed without a tax penalty.

With a maximum subscription of £20,000 per individual for tax year 2026/27, married couples/civil partners can currently jointly save £40,000 each tax year. If they saved this amount each year for ten years they would have a fund of almost £530,000 with fund growth at 5% compound per annum.

Legal fundamentals

Beneficial ownership of the underlying investments must be with the investor, with the legal title lying with the ISA manager or their nominee, or jointly with the investor and either the ISA manager or the ISA manager’s nominee
Because beneficial ownership is with the investor they may enjoy the usual benefits of ownership, such as attending annual general meetings and receiving company accounts, but by arrangement with the ISA manager. Beneficial ownership cannot be transferred so an ISA cannot be gifted or assigned into trust, unlike a life assurance policy or an ordinary unit trust/OEIC holding
The ISA manager claims all the available tax reliefs from HMRC on behalf of the investor
The investor takes out an ISA by making a subscription to the ISA manager who makes and holds investments on behalf of the investor

ISA administration

HMRC Savings Schemes Office (SSO) administers the ISA scheme
Day-to-day management of an ISA must be in the hands of an ISA manager approved by the SSO
The ISA manager claims all the available tax reliefs from HMRC on behalf of the investor
The ISA manager holds the investments
The investor may select the underlying investment themselves – called a self-select or non-discretionary ISA – or leave investment decisions to the ISA manager – a managed or discretionary ISA
A cash ISA can be switched, in whole or in part, to a stocks and shares ISA and vice versa
If your ISA provider offers “flexibility,” you can withdraw cash and replace it within the same tax year without the replacement counting toward your annual £20,000 limit.
ISA managers can be changed at any time by asking the current ISA manager to make the transfer. The ISA manager may charge for this and sometimes the terms of an ISA mean that any transfer can only be made in cash which means any non-cash assets would need to be encashed before transfer
It is important to note that any transfer must be made directly between the ISA managers. Otherwise, if the transfer is made via the investor it may be treated as a subscription which could well exceed the subscription allowance for that particular year. If an investor were to close one ISA and open a new one with a new ISA manager this would count as a new subscription

Eligibility

To be eligible for an ISA, an individual must be:

Resident in the UK for tax purposes or a Crown employee working overseas (or the spouse/civil partner of such an employee). On ceasing to be UK resident, subscriptions must be stopped, but any existing ISAs remain in force and retain their UK tax benefits.
Aged 18 or over. Following the conclusion of the transitional arrangements on 5 April 2026, the minimum age for opening any adult ISA—including the Cash ISA—is now 18. (Junior ISAs remain available for those under 18).
A surviving spouse or civil partner of a deceased ISA investor, entitled to an Additional Permitted Subscription (APS). This is available even if the survivor did not inherit the specific funds held within the deceased’s ISA.

Subscribing for an ISA

For the 2026/27 tax year, the annual subscription limit remains £20,000. Any unused allowance cannot be carried forward to the next year.

Current Rules:

Multiple Subscriptions: You may pay into multiple ISAs of the same type (for example, two different Cash ISAs) within the same tax year, provided your total subscriptions across all accounts do not exceed the £20,000 limit. This means you no longer have to wait until the next tax year to open a new Cash ISA if you find a better rate; you can hold and pay into several simultaneously, provided the total stays within your £20,000 allowance.
Investment Split: You can split your allowance across Cash, Stocks and Shares, Innovative Finance, and Lifetime ISAs in any proportion you choose (subject to the £4,000 limit for LISAs).

Looking Ahead (The 2027 Cash ISA Cap):

Investors should be aware of legislation taking effect on 6 April 2027. From that date, the annual subscription limit for Cash ISAs will be reduced to £12,000 for individuals under the age of 65. Investors aged 65 and over will retain the full £20,000 Cash ISA allowance. The overall ISA limit will remain £20,000, meaning under-65s wishing to use their full allowance will need to allocate at least £8,000 to non-cash components (such as Stocks & Shares).

ISA investments

There are four types of ISAs available:

Cash ISAs (including Help to Buy)
Stocks and shares ISAs
Innovative finance ISAs
LISAs.

The Help to Buy ISA, available from 1 December 2015, is a cash ISA for first-time house buyers (a maximum purchase price of £250,000 (£450,000 in London). The Help to Buy ISA has a maximum subscription limit of £2,400 p.a. The Government pays a bonus of 25% of the amount subscribed each year (to a maximum bonus of £3,000) where the proceeds are used to purchase a first property for up to £250,000 (£450,000 in London). A Help to Buy ISA can be transferred to a LISA (please see below). From 30 November 2019 it is no longer possible to open a Help to Buy ISA account, however it is possible to continue saving until 30 November 2029 and claim the Government bonus by 1 December 2030.

The LISA remains available for investors aged 18 to 39, with a maximum subscription of £4,000 for the 2026/27 tax year. No further subscriptions can be made once the investor reaches age 50. The Government adds a 25% bonus to subscriptions, but a 25% penalty applies to withdrawals made before age 60 for any reason other than the purchase of a first home (up to £450,000) or terminal illness.

The Innovative Finance ISA was introduced from 6 April 2016 and is designed to allow investors to lend all or some of their annual subscription allowance through peer to peer (P2P) lending schemes (also known as crowdlending). Note that the Treasury, HMRC and the FCA are currently carrying out a number of reviews into the appropriateness of the Innovative Finance ISA rules.

A cash ISA, stocks and shares ISA, LISA and Innovative Finance ISA can all be with the same or different providers
A cash ISA can be switched, in whole or in part, to a stocks and shares ISA and vice versa
Permitted investments for ISAs are prescribed in the ISA regulations
For a stocks and shares ISA, the permitted investments include quoted stocks and shares, AIM shares, collectives, such as unit trusts and OEICs, and corporate bonds
Permitted investments for a cash ISA include cash deposits and certain cash-based collectives

Tax fundamentals

No UK tax is deducted from dividends or interest, and there is no Capital Gains Tax (CGT) on profits. These do not need to be reported on a tax return.
While most ISA assets form part of the estate for IHT purposes, shares on the Alternative Investment Market (AIM) held within an ISA can qualify for Business Relief. As of 6 April 2026, the rate of Business Relief for shares designated as “not listed” (including AIM shares) is 50%. This means that while these assets still offer significant tax advantages, they are no longer fully exempt from IHT after the two-year holding period.
ISA income continues to be ignored for the High Income Child Benefit tax charge and the Personal Allowance / Tapered Annual Allowance income threshold calculations.

Death of an ISA investor

On the death of an investor on or before 5 April 2018, income and capital gains which arose from the date of death ceased to be tax exempt. For deaths on or after 6 April 2018, for all types of ISA except the Junior ISA, when the investor dies, their ISA becomes a ‘continuing account of a deceased investor’. No subscriptions, including replacement flexible subscriptions, can be made into a ‘continuing account of a deceased investor’. However, active management of the investments already held within the account may continue subject to the terms and conditions of the account. Funds held within a ‘continuing account of a deceased investor’ continue to benefit from ISA tax advantages. Any interest, dividends or gains in respect of investments in a ‘continuing account of a deceased investor’ are exempt from tax. Its status as a ‘continuing account of a deceased investor’ lasts until either the administration of the estate is complete, the ISA is closed, or the third anniversary of the death of the account investor, whichever is sooner. If, after a period of three years, the administration of the account is ongoing and the account has not been closed, on the next working day following the third anniversary of the deceased’s death, the ISA manager must remove the ISA wrapper from the account and all subsequent income or gains will then become taxable in the hands of the estate.
Benefits can be paid out by the ISA manager in the form of:
- Cash;
- The transfer of investment assets underlying the ISA to the deceased investor’s estate
The value of an ISA at death will always form part of a deceased investor’s estate as an ISA cannot be gifted or assigned into trust so as to change legal ownership
A surviving spouse/civil partner will be entitled to make an additional permitted subscription – please see section on “eligibility” above. For deaths on or before 5 April 2018, the allowance transferred to the surviving spouse/civil partner was equal to the value of the ISA on the date of death. However, for deaths on or after 6 April 2018, the additional permitted subscription can be either the value of the deceased’s ISA at their date of death or the point the ISA ceased to be a ‘continuing account of a deceased investor’, whichever is higher.

Articles on this website are offered only for general information and educational purposes. They are not offered as, and do not constitute, financial advice. You should not act or rely on any information contained in this website without first seeking advice from a professional.

Past performance is not a guide to future performance and may not be repeated. Capital is at risk; investments and the income from them can fall as well as rise and investors may not get back the amounts originally invested.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. For guidance, seek professional advice.

You are now departing from the regulatory site of Finura. Finura is not responsible for the accuracy of the information contained within the linked site.