ISAs explained?

Hi all, I’m fairly new to this game and when I started putting more than pocket change into FT I invested in an ISA account.

I’ve now got a growing portfolio and I wanted to learn more about how this works.

I understand that there’s a limit of £20,000 per ISA per year.

So, here’s a couple of questions:

  • If I put say, £3,000 into my ISA, and that magically grew into £28,000 in investments, does that mean I am not able to sell more than £20,000 worth of my holdings in one go? Would I have to sell £20k’s worth, then withdraw that from my ISA before selling more holdings?
  • If I can sell more than £20,000 worth of holdings in one go, does that just mean I pay tax on anything over that limit?
  • If I then withdraw my funds from my ISA to my standard bank account, will I then need to pay income tax etc on it? If so, how does that work, and what is the point in the ISA if you’re having to pay tax on it eventually anyway?

Thanks for entertaining the questions of a new investor.

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Quite simply, no. ISAs are a tax wrapper. You have a maximum allowance of £20k, but everything within that wrapper is protected from tax. You’re not limited beyond putting in that money. In other words, you can withdraw as much as you want and profit as much as you want. If, in theory, you made £100,000 by investing that £20,000 it’s all yours. No tax, no withdrawal limit and no needing to limit when you sell off your holdings.

Naturally, the yearly limit counts. Anything outside of an ISA - in a general investment account for example - isn’t protected and is subject to capital gains tax. You of course can’t move shares from a GIA to your ISA. Everything you purchase in your S&S ISA and within your limit is tax-free and protected, though.

Naturally, you should always seek out the services of a tax professional if you’re in any doubt. I’m just a moron on the internet and nothing I tell you is legitimate tax advice.

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The £20k per tax year ISA limit is your subscription limit. e.g. this is the limit you can put into all your combined ISAs within a tax year. It doesnt matter what happens with the money inside the ISA once its in.

Keep in mind the £20k limit applies as one limit across all ISA products. So if you add £5k to a IFISA you only have £15k left that you can put into other ISAs like a S&S ISA.

You may have to sell in lumps (Freetrade has a maximum value per trade) but you can make as many as you like. Once its in the ISA its in the ISA.

No. ISAs are a wrapper protecting anything inside it including gains from tax.

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You already paid tax on the way in.

Thanks everyone for your answers, this all seems far better news than I expected.

So just to check I’ve got this right, this is now my understanding.

I can deposit a maximum of £20k into my ISA (or across all my ISAs if I have more than one, which I don’t), per year. This is referring to transferring funds from my regular bank account, into my Freetrade S&S ISA.

That money is then invested into stocks, and lets say theoretically it turns a £100,000 profit and I sell all those stocks, my ISA will now have £120,000 in it. Now, as I haven’t deposited any more money, (that’s just money that has increased through investments), even though the contents of my ISA has increased by £120,000 in one year, that’s fine and I’m not paying tax on any of it.

Then, I want to actually spend that money, so I withdraw that £120,000 (presuming I didn’t want to recycle it back into stocks), and transfer it to my highstreet bank current account and start spending it.

That £120,000 remains completely tax free and I won’t lose any of that when it comes to sending off my tax report in January (I’m a freelancer so submit my sole trader taxes in Jan).

Have I really got that right? If so that’s far better than I expected it to be!

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Yes. The only thing to clarify is you can only deposit into one of each type of ISA in a single tax year. So if you decide to put, say, £12k into your Freetrade ISA, you cannot deposit into another S&S ISA in that year, and you can’t deposit more than £8k into a cash ISA.

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Yeah, you’ve got it right.

You’ve not asked but just a point on ISAs themselves. There are a few type you can only contribute to one of each type per tax year, unless you transfer the entire ISA. The £20k deposit allowance (or subscription) is shared among them all.

There are 4 types

  • cash ISAs.
  • stocks and shares ISAs.
  • innovative finance ISAs.
  • Lifetime ISAs.

So for example, if you have your Freetrade S&S ISA and deposit £10k and then want to open a S&S ISA with Hargreaves Lansdown, you coud open the account but you cant deposit any money into it since you’ve already deposited money into an existing S&S ISA in the same tax year. You would have to transfer the ISA from Freetrade to HL, which you are allowed to do.

But you could open a Cash ISA or any of the other types, and you’d have £10k left of your allowance to deposit money into those accounts.

On one more note. Some ISAs are ‘flexible’ and some are not. If you take money out the Freetrade S&S ISA you don’t regain your allowance.

If you put £10k in in one tax year, and within the same tax year take out £10k, you still only have £10k of your allowance left, not £20k.

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