Guidance

How to manage an ISA investment fund

Find out the rules on investments using open market price rules and how you can charge for your services as an ISA manager.

Delegation of the manager’s functions

Managers may arrange for a third party to carry out some or all of their administrative functions. But where administrative functions are delegated, managers remain responsible for the operation of the ISA.

For example, an ISA manager who isn’t a deposit taker may choose to delegate the administration of his cash ISAs to a deposit taker. The ISA manager could receive subscriptions from the investor and hold them in an account with the deposit taker.

Alternatively the ISA manager and the investor may arrange for the investor to pay subscriptions direct to the deposit taker.

The account with the deposit-taker would be in the name of the investor. but the ISA manager would remain responsible for ensuring that subscription limits aren’t breached.

Managers may offer non-discretionary ISAs, where the investor makes investment decisions. In these circumstances, managers remain responsible for ensuring that investments purchased are qualifying investments.

Investment rules

Managers must make purchases out of cash held in the ISA at the time the investments are paid for and must not allow an ISA to go into a cash deficit. Where a manager also acts as the manager of an authorised unit trust, subscriptions to be used to purchase units in that authorised unit trust may be deposited in an account that isn’t designated as an ISA account.

However, where instructions are given at the same time to match a purchase with a sale, any short period in which the account goes into deficit on the ISA manager’s systems will not breach the ISA rules.

Managers may not purchase investments from either:

  • investor
  • investor’s husband, wife or civil partner

so that they become investments in an ISA to which the investor subscribes or has subscribed.

Managers who offer non-discretionary ISAs may act on investment instructions given by the investor on the telephone, provided the investment rules are satisfied.

See a worked example of investment rules (PDF, 175KB, 1 page) .

The open market price rules

Managers must buy and sell ISA investments at the open market price.

Purchasing investments

The open market price of investments, other than units or shares in qualifying authorised funds, is the price for which those investments might reasonably be expected to be purchased in the open market (see withdrawals of investments from a stocks and shares ISA or a lifetime ISA).

Where an authorised fund is a dual priced unit trust, the open market price for purchases of units is the price of the relevant class of units within the meaning of chapter 6.3 of the Collective Investment Schemes Sourcebook (COLL).

Where an authorised fund is a single priced unit trust or an open-ended investment company, the open market price is the price of the relevant class of units within the meaning of chapter 6.3 of the COLL.

Managers may purchase units and shares in tranches to meet the aggregate requirements of investors. Where the rules of the Financial Conduct Authority (FCA) require him to attribute a uniform price by calculating a weighted average of the prices paid for all transactions in the same allocation period, then that uniform price may be treated as the open market price.

In any other case, where managers make a series of purchases, each ISA involved must reflect its share of each purchase price. An ‘average’ price may not be used.

Selling investments

Managers must sell ISA investments at the price they might reasonably be expected to be sold in the open market.

Withdrawal rights in relation to non-cash innovative finance ISA investments are available only as set out in the terms and conditions of the account.

Withdrawals from an ISA

Investors have the right to withdraw their investments (or, where the manager offers partial withdrawal, part of their investments) by request to the manager (see ISA terms and conditions).

Withdrawal rights in relation to non-cash innovative finance ISA investments are available only as set out in the terms and conditions of the account.

Withdrawals from a Lifetime ISA may be subject to a charge.

For non-flexible ISAs withdrawals do not affect ISA subscription limits. An investor who has subscribed the maximum permitted may make no further subscriptions, regardless of withdrawals.

Where a withdrawal is made from a flexible ISA, any subsequent subscriptions in the same tax year that would otherwise count towards the subscription limit will do so only to the to the extent that previously withdrawn amounts have been fully replaced.

Investments, and the income and proceeds from investments, held in an ISA may normally be paid to the investor without any deduction for tax.

In respect of a Lifetime ISA, the withdrawal of those investments may be subject to a withdrawal charge.

Follow the links for specific guidance on the treatment of interest withdrawn where:

Withdrawals of investments from a stocks and shares ISA or a Lifetime ISA

On the transfer to an investor of an investment, the manager must provide the investor with details in writing of the market value of the investment as at the date of withdrawal.

For shares or qualifying securities listed in the Stock Exchange Daily Official List, managers should take the value computed by reference to section 272 Taxation of Chargeable Gains Act 1992. That is, normally, either:

a) halfway between the highest and the lowest prices (commonly referred to as the ‘middle market’ quotation) at which bargains, other than bargains done at special prices, were recorded in the shares for the relevant date, or

b) the lower of the two prices shown in the quotations for the shares in the Stock Exchange Daily Official List on the relevant date plus one-quarter of the difference between those two figures (commonly referred to as the ‘quarter up rule’).

Managers should take the amount at (a) unless:

  • it’s greater than the amount at (b), or
  • there were no such bargains as at (a)

In those circumstances they should take the amount at (b).

If the London trading floor was closed on the relevant date, managers should determine the market value by reference to the previous date or earliest subsequent date on which it is open, whichever affords the lower market value.

Where the date of valuation falls on or after 6 April 2015, the market value of shares, qualifying securities or strips included in the official UK list is the lower of the two prices shown as the closing price in the Stock Exchange Daily Official List for that day plus one half of the difference between those two figures.

If the Stock Exchange is closed, the value is that value on the latest previous day on which it was open.

This doesn’t apply to determine the market value of shares or securities where in consequence of special circumstances the closing prices quoted in the Stock Exchange Daily Official List are by themselves not a proper measure of market value of the shares or securities.

In that case the market value is determined under section 272 of Taxation of Chargeable Gains Act 1992 as the price shares might reasonably be expected to fetch on a sale in the open market.

Where the date of valuation falls on or after 6 April 2015, for shares, qualifying securities or strips listed on a foreign stock exchange but not included in the official UK list, the market value is the price shown in the foreign exchange list for that day as the closing price.

If more than one price is shown, managers should take the lower price plus one half of the difference between the two figures. If the exchange is closed, the value is that value on the latest previous day on which it was open.

Where securities are quoted in more than one foreign exchange list, the list published for the exchange which is regarded as the major exchange for such securities should be used.

If no exchange is regarded as the major exchange, any list published for a foreign stock exchange in the territory in which the issuing company is resident should be used.

Where a strip or a security exchanged for strips of that security is quoted in more than one foreign exchange list, the list published for the exchange which is regarded as the major exchange in the territory of the issuing government should be used.

The market value of units is the price at which unit trust managers are prepared to buy units from unit holders, known as the ‘bid’ price.

Unit trust managers publish this price on a daily basis. Where the bid price was not published at the date for which the valuation is required, managers should use the bid price on the latest day before.

Managers should note that the market value isn’t reduced by exit, redemption or withdrawal fees.

The market value of shares in open-ended investment companies (OEICs) is the price at which the company is prepared to buy shares from shareholders. OEICs publish this price on a daily basis.

Where the price was not published at the date for which the valuation is required, managers should use the price on the latest day before.

For shares or qualifying securities that aren’t listed on a recognised stock exchange, for example shares and qualifying securities admitted to trading on a recognised stock exchange in the European Economic Area, the market value will normally be the closing price on that day.

Where that isn’t a proper measure, the market value is determined under section 272 of Taxation of Chargeable Gains Act 1992 as the price shares might reasonably be expected to fetch on a sale in the open market.

Withdrawals of insurance investments from an ISA

Life insurance policies can’t be withdrawn from the ISA by the investor. The proceeds from termination of the policy (or the partial surrender of the rights in the policy) may be withdrawn.

Proceeds from termination of the policy (or the partial surrender of the rights in the policy) if withdrawn from a Lifetime ISA may be subject to a withdrawal charge.

Withdrawals from an innovative finance ISA

Withdrawal rights in relation to non-cash innovative finance ISA investments are available only as set out in the terms and conditions of the account.

Cash withdrawal by cheque

An ISA investor may make a withdrawal by cheque but then want to reverse the transaction before the cheque is presented.

When the manager processes the withdrawal request, the funds leave the ISA wrapper so that the manager can issue the cheque.

Even if the cheque isn’t presented, once a withdrawal request has been processed the funds sits outside the ISA wrapper and can only re-enter the ISA as a fresh subscription (which will count towards the annual limit and will be subject to the headroom that the investor has available).

Even if the cheque isn’t presented, this withdrawal may be liable to a withdrawal charge when made from a Lifetime ISA.

The funds can only re-enter the Lifetime ISA as a fresh qualifying addition, which will count towards both the Lifetime ISA payment limit and the overall ISA subscription limit.

Cash withdrawn from an ISA in error

Cash withdrawn from an ISA in error by the investor (or the investor’s agent) can’t normally be reinstated.

The exception is that cash withdrawn in error by the investor (or the investor’s agent) may be reinstated where both:

  • the investor (or the agent) was attempting to transfer the ISA
  • the old ISA manager (or the new ISA manager) incorrectly advised the investor (or the agent) to withdraw the funds invested with the old manager and pay them into an ISA with the new manager

If a manager believes that an investor (or the investor’s agent) withdrew money from an ISA during an attempted transfer because they gave incorrect advice, they should email savings.audit@hmrc.gsi.gov.uk, requesting approval to reinstate the cash removed from the ISA in error.

The application should be entitled application to reinstate money removed from an ISA in error and should contain the:

  • ISA manager’s name
  • customer’s name
  • circumstances giving rise to the error
  • evidence of the investor’s or agent’s intention to transfer the ISA (a copy of the transfer form, a letter or email requesting the transfer, or a transcript of a telephone call in which the transfer was discussed)
  • evidence of the incorrect advice given (copies of the relevant correspondence, a transcript of a telephone call in which the incorrect advice was given, or where the advice was given in a face-to-face meeting, a statement signed by the member of staff who gave the incorrect advice)

If in relation to an attempted transfer from a Lifetime ISA to another Lifetime ISA, the ISA manager should also give details of any charge that has resulted from the withdrawal.

If HMRC are satisfied that the money was removed from the ISA (or the ISA was closed) wholly because of manager error they will authorise the manager to reinstate the money removed in error (or reinstate the ISA).

In the case of a Lifetime ISA, HMRC may authorise the manager to reverse any withdrawal charge that has been made.

They may also charge a penalty under the rules for simplified voiding.

Cash withdrawn from an ISA in error by the ISA manager may be reinstated (along with any additional compensation to cover lost interest or dividends) without reference to HMRC where the investor (or the investor’s agent) gave the manager clear instructions and the manager misinterpreted these instructions and either:

  • withdrew money from (or closed) the investor’s ISA in error
  • withdrew money from (or closed) another investor’s ISA in error, for example, John Smith instructs the manager to remove £3,000 from his ISA and the manager instead removes £3,000 from James Smith’s ISA and pays it to John Smith

However, managers may not reinstate where the investor’s (or the agent’s) instructions were unclear or were capable of being misunderstood.

Managers should retain evidence justifying their decision to reinstate cash withdrawn from an ISA in error without reference to HMRC with the investor’s ISA records and make them available at the next audit to the HMRC auditor.

In relation to Lifetime ISAs, the ISA manager should seek guidance from HMRC before reinstating the withdrawn funds.

If a manager isn’t sure whether the investor’s (or the agent’s) instructions were clear or were capable of being misunderstood he should email savings.audit@hmrc.gsi.gov.uk, requesting approval to reinstate the cash removed from the ISA in error.

The application should be entitled application to reinstate money removed from an ISA in error and should contain the:

  • the ISA manager’s name
  • the customer’s name
  • the third party administrator’s name (if appropriate)
  • the circumstances giving rise to the error

If in relation to a Lifetime ISA, they should also give details of any charge that has resulted from the withdrawal.

If HMRC are satisfied that the money was removed from the ISA (or the ISA was closed) wholly because of manager error they will authorise the manager to reinstate the money removed in error (or reinstate the ISA).

They may also charge a penalty under the rules for simplified voiding.

HMRC will monitor the requests they receive, as this may be an indication of potential systems problems. They may also use them to inform their risk based audit program.

Managers should therefore retain copies of the correspondence with the investor’s ISA records as evidence that the reinstatement was authorised by HMRC.

Compensating investors

Delay in purchasing (or selling) specific investments as required under the customer agreement

Where, in error, a manager fails to purchase (sell) specific investments within an ISA as required under the customer agreement, and the value of those investments has subsequently increased (decreased), the manager may be liable to, or agree to, compensate the investor.

Compensation to put the investor in the position he would have been in had the investment been purchased (sold) at the right time may be paid into the ISA.

The payment will not count towards the subscription limit or the Lifetime ISA payment limit, and will not be a qualifying addition for the purposes of a Lifetime ISA bonus and should not be recorded as such, but the manager should retain evidence of the circumstances in which the compensation was paid.

Delay in transferring an ISA

Any compensation paid in respect of a delay in transferring an ISA, in order to put the investor in the position he would have been in had the ISA been transferred without delay, may also be paid into the ISA.

The payment will not count towards the subscription limit or the Lifetime ISA payment limit, and will not be a qualifying addition for the purposes of a Lifetime ISA bonus and should not be recorded as such, but the manager should retain evidence of the circumstances in which the compensation was paid.

Delay in opening an ISA or accepting a subscription

Any compensation paid in respect of a delay in opening an ISA, or in accepting a subscription to an ISA must be paid to the investor outside the ISA as the funds in question aren’t held within the ISA wrapper (unlike Delay in purchasing (or selling) specific investments as required under the customer agreement and Delay in transferring an ISA).

The compensation can be subscribed to the ISA by the investor but will count as a subscription for all purposes.

Pre-funding UK income tax reclaimable from HMRC to an ISA

Managers may pre-fund UK income tax reclaimable from HMRC to an ISA.

Pre-funding may take place on or after the date on which the payment of taxed income is received by the manager, but not before that date.

Managers may not pre-fund in respect of Lifetime ISA bonus payments.

Where managers pre-fund, they must keep adequate records to identify all income distributed and tax claimed.

Manager’s fees and charges

Managers may choose to charge the investor for services they perform while managing an ISA.

Fees related to the administration of the ISA, such as charges for opening, maintaining or closing an ISA, or arranging for the investor to receive copies of annual reports and accounts or to attend general meetings, can be paid from funds held outside the ISA, if the investor so wishes and the manager agrees.

In the case of a flexible ISA, only sums withdrawn by the investor can be replaced without counting towards the subscription limit. Monies withdrawn by the ISA manager to cover fees and charges can’t be replaced without the subscription counting towards the annual subscription limit.

Charges related to the purchase and sale of ISA investments, such as dealing commission charges, stamp duty, and the initial charge made by a unit trust manager when purchasing units in a unit trust (or by the authorised corporate director of an OEIC when purchasing units or shares in an OEIC), must be met from funds within the ISA.

A simple test managers can apply is to ask themselves whether the charge would still be levied (at the same or another rate) had the investor made the purchase (or sale) outside the ISA.

If it would, the charge is part of the cost of acquiring (or disposing of) the investment and must be met from funds within the ISA.

If it would not, the charge is part of the cost of managing the ISA and can therefore be paid from funds held outside the ISA.

In respect of Lifetime ISAs, any fees and charges paid directly from the Lifetime ISA to the ISA manager in accordance with the account’s terms and conditions will not be treated as a chargeable withdrawal.

Rebated fees and charges

HMRC have published a brief on the tax treatment of payments of ‘trail commission’ passed on to investors in collective investment schemes and other associated investment products including life insurance policies.

Where the commission is in respect of an ISA investment, the guidance below on reinvesting it into an ISA will apply, but the general position is that commission paid in respect of an ISA investment isn’t taxable and if it’s paid to the ISA manager who reinvests it within the ISA, it won’t count as a fresh subscription.

This is because the payment has never left the control of the ISA manager and is treated as being within the ISA wrapper.

If the commission is paid out to the investor or to a third party, it has left the ISA wrapper and can only re-enter it as a fresh subscription.

Where a gross cash rebate is paid in a case which involves an ISA repair or void, or where the investor is deceased, the manager should notify the investor or the estate of the gross payment details and inform them that it’s their responsibility to declare the payment to HMRC.

Reimbursed commission

This occurs when a fund manager pays a percentage of their annual management fee (AMF) to the introducing agent or independent financial adviser (IFA).

This is a payment made to the introducing agent or IFA for the retention of the business. There’s no agreement with the investor for a fee reduction.

These monies aren’t considered to be the investor’s funds and aren’t a permitted credit to the ISA other than by way of a subscription.

The rebate is being paid outside the ISA to the introducing agent or IFA. If the introducing agent or IFA decides to pass some or all of the rebate to the investor it can only go into the ISA as a fresh subscription.

Annual management fee rebate

This occurs when the fund manager has an agreement with the ISA manager, who in turn has an agreement with the investor, to charge a reduced AMF on a fund.

Where, because of procedural restrictions, only a single AMF charging facility exists, the fund manager will refund the AMF overcharge to the ISA manager.

The ISA manager then will reimburse each investor’s ISA to put them in the position they would have been in had the correct (reduced AMF) been charged.

This reimbursement isn’t a fresh subscription and doesn’t count towards the annual subscription limit or the Lifetime ISA payment limit, and will not be a qualifying addition for the purposes of a Lifetime ISA bonus as the payment has never been paid out of the ISA wrapper to the investor.

For example, the fund has a fixed fee of 3% but the manager negotiates either a reduced fee of 2% or ‘such reduction as he can negotiate’. The agreement with the investor is for a 2% fee or such reduced fee as can be negotiated. The rebate can remain in the ISA without counting as a fresh subscription.

Annual management fee rebate (WRAP platforms containing a CASH account)

Where the investor holds several different investment types, including an ISA, on a WRAP platform and the WRAP platform contains a CASH account, the rebate may be paid into the CASH account (which doesn’t affect the ISA) or (if it’s paid in respect of an ISA investment) directly into the ISA account.

Where this is the case, it doesn’t count as a fresh subscription or count towards the annual subscription limit.

The Lifetime ISA payment limit and will not be a qualifying addition for the purposes of a Lifetime ISA bonus.

If the rebate is paid into the CASH account, the WRAP manager may then transfer that part of the rebate that relates to an ISA investment to the ISA account. If he does, the transferred rebate will not count as a fresh subscription.

New RDR rules

Where less is deducted from the customer’s payment than before (whether directly, or because the commission is diverted back to the customer in the form of units instead of being paid to the adviser), this doesn’t count as an additional subscription to the ISA and doesn’t count towards the annual subscription limit, the Lifetime ISA payment limit and will not be a qualifying addition for the purposes of a Lifetime ISA bonus.

Where the rebate is paid outside the ISA wrapper to the customer as cash, including into a (non-ISA) cash account (pending the FCA’s proposed ban on cash rebates) and the customer chooses to invest that amount into the product, that payment would be a new ISA subscription.

If the rebate stays with the ISA manager and isn’t paid to the ISA customer before it’s reinvested in the ISA, it won’t count as a new subscription.

See a worked example of new RDR rules (PDF, 86.3KB, 1 page) .

Using an ISA as security for a loan

It’s a requirement of the ISA regulations that:

  • the ISA investments remain in the beneficial ownership of the investor
  • the investor can transfer his or her ISA or make withdrawals, without restriction
  • the manager (in the case of a discretionary ISA) can make purchases and sales without restriction

There are various types of charge a lender may require in connection with a loan.

Except where a manager is an ISA insurer manager, title to ISA investments must be vested in the manager or his nominee or jointly in one of them and the investor.

Where the manager is an ISA insurer-manager, title to ISA investments must be vested in the investor.

It would not be consistent with either requirement for an investor to charge, or a manager to permit him to charge, investments by way of a legal mortgage, that is by transferring the title on the register of shareholders or unit holders to the chargee.

Charge by way of equitable mortgage

Except where a manager is an ISA insurer-manager, share certificates or other documents evidencing title to ISA investments must be held by the manager or as he may direct. The phrase “as he may direct” means that the manager has power to direct holding of title documents by a custodian subject to any further directions he may give from time to time.

Once a manager had allowed deposit of the relevant certificate with the mortgage title documents with an equitable mortgage he would be powerless to give further directions until the mortgage terminated.

Where the manager is an ISA insurer-manager, the policy document or other documents evidencing title to ISA investments must be held by the investor.

An equitable mortgage of shares or units is effected by a deposit of the relevant certificate with the mortgagee. A manager can’t consent to the investor creating, or join with him or her in creating, a charge by way of equitable mortgage.

Mere equitable charge

Similar constraints do not arise where an investor creates an equitable charge.

The charge could be held either on his or her beneficial interest in the ISA investments or, where necessary, with the assistance of the manager, on the investments themselves.

A charge, as distinct from a mortgage, doesn’t pass either an absolute or a special property in the subject of the security to the creditor or any right to possession, but only a right of realisation by judicial process in the case of non-payment of the debt.

If the charge was by deed the chargee would have certain statutory powers under Section 101(1) of the Law of Property Act 1925 in that respect. If not, they would have to apply to the Court.

If the debt was not paid and the creditor sought to realise the charged property, beneficial ownership by the investor would, of course, cease when his or her interest in the investment was sold or when a receiver was appointed.

In those circumstances the ISA would become invalid. In the case of a Lifetime ISA, a withdrawal charge may be due. ISA managers should contact HMRC for further advice in these situations.

HMRC have no objection if a borrower agrees with a lender (not the manager) that he or she will not withdraw his or her investments whilst the loan remains outstanding.

A manager may also accept a power of attorney in favour of the lender to exercise its security if the borrower is in default.

Stock lending

Stock lending is a transaction where somebody borrows securities from another person by taking a transfer of the securities from that person in order to enable him or her to fulfil a contract to sell securities of that kind to a third person.

In return he or she promises to transfer securities of the same kind to the person from whom he or she has borrowed the securities that have gone to the third person and to compensate the lender for any dividends which would have been received during the loan period when he or she does so.

Lending of this sort by a manager isn’t compatible with his or her duties as an ISA manager. The title to investments must be vested in the ISA manager or his or her nominee, or jointly in one of them and the investor, the share certificate must be held by the manager or as he or she may direct and, above all, the investments must be in the beneficial ownership of the investor.

None of this is compatible with an arrangement under which the investments are sold to a third person and subsequently replaced by different investments of the same kind.

This doesn’tprevent an investment trust manager from engaging in stock lending of the investments held by the trust, as the title to the investments held in the ISA doesn’t change.

Before 1 July 2015, lending of fund investments in exchange for short-lived securities may have caused the fund to fail the 50% test (see recognised UCITS).

However, for the purposes of the 50% test, investments held by an investment trust that had been transferred under a stock lending arrangement (as defined in section 263B Taxation of Chargeable Gains Act 1992) were deemed to be held by the trust until the arrangement was concluded.

The collateral received in exchange for the transferred investments should not have been included as part of the investments of the trust, scheme or UCITS for the purposes of the 50% test.

Child Maintenance Deduction Orders

The Child Support Collection and Enforcement (Deduction Orders) Amendment Regulations 2009 enable the Child Support Agency (CSA) to claim money from the accounts of customers who have outstanding debts with them.

The CSA will instruct financial institutions to freeze a lump sum for a 21-day appeal period. After this period the money will either be paid over to the CSA or, if the appeal was successful, the freezing order will be cancelled.

Where an enforcement order is attached to an ISA account the funds will remain in the beneficial ownership of the investor during the 21-day appeal period. The ‘frozen’ funds may therefore remain in the account and the account will remain an ISA.

If the manager transfers the sum covered by the enforcement order to a suspense account pending resolution of the appeal, that sum can be paid back into the ISA without counting as a fresh subscription if the appeal is successful and the enforcement order is cancelled.

Any amounts removed from a Lifetime ISA in these circumstances will be treated as a withdrawal, and may be liable to a charge.

Where, in the circumstances described above, an appeal is successful and the enforcement order is cancelled, the sum can be paid back into a Lifetime ISA without counting against the Lifetime ISA payment limit, but will not be a qualifying addition on which a bonus can be paid.

The investor can apply to HMRC for the repayment of any withdrawal charge that has been made in respect of the removal of the sum.

HMRC Direct Recovery of Debts

HMRC’s debt collection powers allow the direct recovery of debt from cash held in the bank and building society accounts of debtors who have the means to pay but choose not to do so.

This includes cash held in cash ISAs, but not cash held in stocks and shares, and innovative finance or Lifetime ISAs.

Once debt recovery has been initiated there will be a 30 day window for the debtor to lodge an objection. Where the ISA manager holds the funds temporarily in a suspense account during this window, it can be paid back into the ISA, together with any interest, without counting as a fresh subscription if the debt recovery is subsequently cancelled.

Where a direct debt recovery is made from a flexible ISA, this will not count as a withdrawal of cash by the investor and can’t be replaced without the subscription counting towards the annual subscription.

Published 5 April 2018