Find out what investments qualify for a cash ISA, and the rules on connected accounts.
Qualifying investments for cash ISAs
Qualifying investments for the cash ISA are:
- cash deposited in one of the following that is designated as an ISA account:
- a deposit account specified as a stakeholder product by regulation 4 FSMA 2000 (Stakeholder Product) Regulations 2004 (SI 2004/2738).
- alternative financial arrangements falling within S47 and 49 Finance Act 2005
- securities, other than National Savings certificates, premium savings bonds, National Savings stamps and National gift tokens, issued under the National Loans Act 1968 or the National Savings Bank Act 1971, on terms that provide for them to be held in the cash component of an ISA
- money market funds as defined in the Collective Investment Scheme information guide (COLL) 5.9.5
- short-term money market funds as defined in COLL 5.9.3
- If acquired before 1 July 2014:
- units in a collective investment scheme specified as a stakeholder product by regulation 5 of the Stakeholder Product Regulations
- shares in a company
- qualifying investments in policies of life insurance made after 5 April 2004 that would otherwise have been eligible for the stocks and shares ISA but failed the 5% test that applied before that date
In practice, managers can operate a single account – which may also hold other savings products, such as stocks and shares ISA, feeder fund, and current account balances – provided both of the following apply:
- the account is designated as an ISA account
- the monies relating to each investor’s ISA are recorded and can be accounted for separately
A ‘Credit Union’ is a society registered as a credit union under the Industrial and Provident Societies Act 1965 or the Credit Unions (Northern Ireland) Order 1985.
A Credit Union regulated by the Financial Conduct Authority (FCA) and subject to the Financial Services Compensation Scheme can provide ISA cash component products.
An ‘alternative finance arrangement’ is an arrangement falling within S47 and 49 of Finance Act 2005 (savings products providing similar types of return to a deposit savings account). It covers products such as Sharia accounts that do not pay interest.
Where at any time, a cash ISA is connected with another savings account that is not an ISA, a Junior ISA or a Child Trust Fund, it will cease to be a qualifying investment.
A cash ISA is connected with another account if either was opened with reference to the other, or with a view to either:
- enable the other to be opened on particular terms
- facilitate the opening of the other on particular terms
and the terms on which the cash ISA was opened would have been significantly less favourable to the investor if the other had not been opened.
HMRC will accept that an account is not a connected account if it is a “feeder” account opened to enable investors to fund future deposits into an ISA, provided that the interest on the feeder account is in line with the interest paid on the ISA manager’s other savings accounts. Such feeder accounts should not be included on ISA managers’ returns of information.
HMRC will not use the ‘connected accounts’ rule in cases where the terms of the connected accounts are the same. For example, where an ISA manager offers an instant access cash ISA paying interest at x% on condition that the investor invests £10,000 in an instant access deposit account paying interest at x%, the ‘connected accounts’ rule would not be applied. But where an ISA manager offers a cash ISA paying interest at (x + 5)% on condition that the investor invests £10,000 in a deposit account paying interest at (x - 5)% the ‘connected accounts’ rule would be applied.