ISAs explained?

First Time Investing šŸ£
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Hi all, Iā€™m fairly new to this game and when I started putting more than pocket change into FT I invested in an ISA account.

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

I understand that thereā€™s a limit of Ā£20,000 per ISA per year.

So, hereā€™s a couple of questions:

  • If I put say, Ā£3,000 into my ISA, and that magically grew into Ā£28,000 in investments, does that mean I am not able to sell more than Ā£20,000 worth of my holdings in one go? Would I have to sell Ā£20kā€™s worth, then withdraw that from my ISA before selling more holdings?
  • If I can sell more than Ā£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 youā€™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 Ā£20k, but everything within that wrapper is protected from tax. Youā€™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 Ā£100,000 by investing that Ā£20,000 itā€™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 - isnā€™t protected and is subject to capital gains tax. You of course canā€™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 youā€™re in any doubt. Iā€™m just a moron on the internet and nothing I tell you is legitimate tax advice.

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The Ā£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 Ā£20k limit applies as one limit across all ISA products. So if you add Ā£5k to a IFISA you only have Ā£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.

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

So just to check Iā€™ve got this right, this is now my understanding.

I can deposit a maximum of Ā£20k into my ISA (or across all my ISAs if I have more than one, which I donā€™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 Ā£100,000 profit and I sell all those stocks, my ISA will now have Ā£120,000 in it. Now, as I havenā€™t deposited any more money, (thatā€™s just money that has increased through investments), even though the contents of my ISA has increased by Ā£120,000 in one year, thatā€™s fine and Iā€™m not paying tax on any of it.

Then, I want to actually spend that money, so I withdraw that Ā£120,000 (presuming I didnā€™t want to recycle it back into stocks), and transfer it to my highstreet bank current account and start spending it.

That Ā£120,000 remains completely tax free and I wonā€™t lose any of that when it comes to sending off my tax report in January (Iā€™m a freelancer so submit my sole trader taxes in Jan).

Have I really got that right? If so thatā€™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, Ā£12k into your Freetrade ISA, you cannot deposit into another S&S ISA in that year, and you canā€™t deposit more than Ā£8k into a cash ISA.

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Yeah, youā€™ve got it right.

Youā€™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 Ā£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 Ā£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 youā€™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 youā€™d have Ā£10k left of your allowance to deposit money into those accounts.

On one more note. Some ISAs are ā€˜flexibleā€™ and some are not. If you take money out the Freetrade S&S ISA you donā€™t regain your allowance.

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

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A quick question

In my GIA (Invest acc) i have made some gain in last 4 year of my Freetrade journey.

Im planing to cash about 40-50% for down payment for a property. Tax free allowance on capital gain is Ā£12,300 of this year, my planed sale n withdrawal will exceed this limit.

i do have another share and ISA account which i know is free from capital gain, but i have taken massive loss this year in my ISA account from sales. Can i show losses from ISA account to of set my Invest gains.

I believe ISA losses cant be used to offset investment gain; but i thought its worth the ask from our community. Someone that may have been in a similar situation.

Thanking in advance for reading and your kind opinions.

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No you canā€™t do that.

You can withdraw the CGT amount today and then the same in the new tax year to effectively double the amount.

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Hi. Sorry to butt in here.
Does anyone know what the consequences are if you pay into 2 separate stock isa in the same year ?
But donā€™t breach the Ā£20k limit.
Iā€™ve even phone HMRC today and they canā€™t tell me.
They told me to inform the isa provider.
They came back and said we canā€™t give tax advice. Contact a financial advisor :see_no_evil:

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There is no consequence. You can have as many S&S ISAā€™s as you like as long as you donā€™t go over the Ā£20k limit in a year.

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You can only invest Ā£20k with 1 Isa provider per year tho.
Iā€™m still at a loss if you break the rules.

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I did it once and they wrote to me telling me off. It was something like Ā£15 many moons ago. I believe they threatened to tax the interest is earned tax free.

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But you canā€™t open or fund more than 1 of a kind in the same tax year.
Not sure why youā€™re pushing incorrect information here?!

You can put money into one of each kind of ISA each tax year.

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On a more broad noteā€¦ Iā€™ve always wondered what is the point in ISAs from a societal and policy perspective?

Why do they exist? Which government created them and what problem were they trying to solve at the time?

Nothing against ISAs Iā€™ve just never understood them on that level.

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Yes @SebReitz thats what i was trying to explain but should have articled it better. The link is helpful.

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Donā€™t forget that Freetrade has a decent set of articles in the Learn Hub about stocks and shares ISAs. Recommend this as a first port of call for people who are interested the topic of the post.

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Chris Palmer (YouTuber) recently made a video on ā€˜bestā€™ stocks and shares ISA which included Freetrade. Personally I would have placed Freetrade much higher than he thought but it may offer some helpful info for some.

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Have never heard of Invest Engine. Curious about that.

Doesnā€™t quite give the full picture without mentioning Interactive Brokers or Trading 212 (although in fairness the latter still has a waiting list).

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Invest Engine looks like a good proposition for ETF investors. Much like Vanguard but with more choice

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