I really thought that I know the ISA rules inside out. Until last night, I was messing around on the internet, as you do, and found something that surprised me.
Hence, decided to double-check some of the rules of ISA – the end of the tax year is rapidly approaching, and I wanted to ensure all is well.
As it turned out, my knowledge wasn’t as perfect and up to date as I thought it is. I had assumed something forgetting that ISAs may be good instruments for tax-free investing but they are shrouded in many rules. Some of these ISA rules make little sense and still breaking them may lead to you missing out on the tax advantages that ISAs afford.
Hence, I decided to research, and share with you, the little-known rules of ISA helping you use this investing instrument to its full potential.
Here they are. I’ve presented these ISA rules as seven questions (and focused on stocks and shares ISAs because I think that cash ISAs are not worth bothering with when interest rates are so low).
ISA Rule 1: Can I sell my stocks and shares ISA?
Yes, but…
You ought to remember that a stocks and shares ISA is like the wrapper of a lovely piece of chocolate. You can rap any kind of chocolate in it – index funds, ETFs, individual stocks, and a combination of all these.
You can always sell the chocolate.
An important question to ask yourself is not about the rules of stocks and shares ISA but about intention. In other words, don’t ask whether you could sell your ISA but whether you should sell it.
Most people, sell their stocks and shares ISA when they:
- need the money;
- try to minimise their loss when the value of the ISA has declined.
You can’t do much if you need the money though dipping into your stocks and shares ISA is not ideal.
Selling because you fear loss, however, should be avoided at all costs. Remember that statistically downward stock market corrections recover in three to twelve months.
In brief: Yes, you could sell your stocks and shares ISA but you probably shouldn’t.
ISA Rule 2: What happens to my stocks and shares ISA when I die?
Good question though I hope it won’t come to that anytime soon.
According to the old rules of stocks and shares ISA, were you to die your ISA would have lost its tax-free status. This means that your partner (or any beneficiary from your estate) would have had to start paying tax on any returns or income earned from it.
This may not sound very bad if we are talking about small amounts of money but could add up to a lot if you (your partner) have been saving and investing according to The Money Principle ideology.
This rule changed in April 2015.
According to the amended rules of stocks and shares ISA, the tax-free benefits can be passed on by increasing the beneficiary’s tax-free allowance for the year of death to include the value of the inherited ISA.
For instance, if I die in 2018 John’s ISA allowance for 2018-2019 would be:
£20,000 + value of Maria’s ISA
In brief: Save and invest in stocks and shares ISA with no concern – your loved ones would benefit greatly from it without losing the tax-free advantages it offers.
ISA Rule 3: Can I have more than one stocks and shares ISA?
This question has a short answer and a bit longer one. Who said that anything about ISAs is straight forward?
In brief, yes can have more than one stock and shares ISA.
But, you ought to understand two things, though:
- You can open one stocks and shares ISA, with a different provider, per tax year.
- During a tax year, you can contribute to only one stocks and shares ISA.
You can, however, split your ISA allowance between cash ISA, investment ISA and innovative finance ISA if it doesn’t exceed the yearly allowance (currently £20,000).
It doesn’t make much sense, I know. Still, splitting your yearly contribution between two stocks and shares ISAs may result in you losing the tax benefit on one of them.
In brief: You can have more than one stocks and shares ISA but can contribute to only one of them during a tax year.
ISA Rule 4: How risky is a stocks and shares ISA?
There are risks involved in every investment.
Your stocks and shares ISA is exactly as risky as the investments you have in it.
You could learn more about the risks that investing inevitably presents here.
In brief: Stocks and shares ISAs are as risky as the investments within them.
ISA Rule 5: How to calculate stocks and shares ISA fees?
It seems to me that most people miscalculate the fees they pay for their stocks and share ISA.
It took me some time to realise that providers charge three kinds of fees:
- Fees for administering your account;
- Investment fund costs; and
- Market spread costs.
For years I thought that my stocks and shares ISA fee is 0.75% when in fact it is 0.95%. Doesn’t look much but it all adds up. And it is always good to know how much your ISA costs you.
In brief: Always check for fees above the management fee for stocks and shares ISA.
ISA Rule 6: Can I have a joint stocks and shares ISA?
Here things are simple:
ISA is an individual account and you cannot open one in joint names or for someone else.
That’s it.
If you are concerned about what happens to your investment when you are gone, refer to the second little known rule of stocks and shares ISA.
In brief: ISA is an individual investment account and it cannot be under more than one name.
ISA Rule 7: Can I open stocks and shares ISA with poor credit score?
Yes, you can.
There have been people believing that ISA providers refuse to open accounts on the grounds of poor credit score. This is not likely – your credit score is important when you want to borrow money, not when you save money.
In brief: Yes, you can open a stocks and shares ISA with poor credit score.
Finally…
These ISA rules can make all the difference between using the tax-free opportunity the instrument affords to its best or saying a regretful farewell to them. Still, when it comes to financial instruments like ISA we usually pay attention to the ‘big’ stuff; like how much is the allowance, the differences between different ISAs, etc.
Money hiccups are often rooted in either ignorance or ignoring, the little-known rules ISA.
Here, I shared my research on seven rules of stocks and shares ISA that you are likely less familiar with.
Do you know which of these caught me by surprise?
The rule about not being able to contribute to more than one stocks and shares ISA in the same tax year. What is the point of that?
Now that you know these ISA rules, go and check your accounts. Be educated, be smart.
Do you have more than one stocks and shares ISA? Why?
photo credit: Distant Reality Released via photopin (license)
Good points Maria! Do wish Isas were less confusing as I think it can put people off using them. Shame as Isas mean you keep more of your money. I do have more than one stocks and shares Isa. They are on different platforms containing different investments, because you can open and fund a stocks and shares Isa one tax year, then just hang on to it and open and pay into a new one another tax year. Just can’t pay into two stocks and shares Isas in the same tax year. One point for couples: when I was on maternity leave and my husband was earning more, we put the max into his Isa (lower limit then) then put extra money into an Isa in my name. Good for financial planning as a family, less good if there are ever trust issues or a relationship breakdown in future.
@Faith: I was asking myself why would the British government implement a financial instrument that appears to encourage ‘small investors’ and than make it so complicated. There are two possible answers: a) elites don’t really like the idea of ‘small investors’ and are taking with the other hand what they have offered with the first; and b) total incompetence (which is quite possible).
We will probably will diversify our ISAs as well; I didn’t realise though that that one cannot invest in two of the same kind in the same tax year. And still think it makes very little sense.
John and I always put the same amount in our ISAs (we earn differently). We trust each other (I know. Still even marriage today is a triumph of hope over experience.)