Find out which stocks and shares you can purchase, make or hold in an investor's stocks and shares ISA.
Qualifying investments for stocks and shares ISAs
The investments that managers may purchase, make or hold in a stocks and shares ISA (‘qualifying investments’) are:
- personal equity plan (PEP) investments
- securities issued by companies
- government securities
- core capital deferred shares, known as ‘CCDS’
- securities issued by certain multilateral organisations
- units or shares in a UK undertakings for collective investments in transferable securities (UCITS)
- units or shares in a qualifying non-UCITS retail scheme
- shares and securities in qualifying investment trusts
- units or shares in a recognised UCITS
- shares emerging from a Schedule 3 Save As You Earn (SAYE) option scheme or a Schedule 2 Share Incentive Plan
- depositary interests
- depositary receipts, American depository receipts and American depository share
- units in a collective investment schemes specified as stakeholder products
- life insurance policies that satisfy the ISA requirements
- policies of life insurance issued before 5 April 2004 that had previously qualified for the separate insurance component
- investments held in a PEP at 5 April 2008 that were qualifying investments under regulation 6(2)(m) of the Personal Equity Plan Regulations 1989 (but see PEP Investments)
All PEP investments held at 5 April 2008 qualify as ISA investments on 6 April 2008. Where any of those investments subsequently change, for example where there’s a change in the nature of the investments, or a change in the place of listing, the investments will continue to qualify as ISA investments only where one of the following applies:
Shares, other than shares in an investment trust, are qualifying investments if:
- they’re issued by a company (see below) that is incorporated anywhere in the world
‘Company’ means any body corporate having a share capital other than:
- an open-ended investment company within the meaning of section 236 of the Financial and Services and Markets Act 2000
- a UK UCITS a non-UCITS retail scheme, or a recognised UCITS
Qualifying shares do not include:
- nil paid rights (purchased in the market by the manager)
- warrants to subscribe for shares (but see shares and securities in investment trusts)
- futures and/or share options
These investments aren’t qualifying investments and may not be held in a stocks and shares ISA (but see PEP investments and shares emerging from a Schedule 3 SAYE option scheme or a Schedule 2 Share Incentive Plan).
‘Security’ means any loan stock or similar security of a company whether secured or unsecured. Qualifying securities may therefore include:
- loan stocks (whether secured or not)
Managers may hold securities in registered or bearer form.
Securities (as defined above) other than securities in an investment trust, are qualifying investments if:
- they have been issued by a company that is incorporated anywhere in the world
- they satisfy at least one of the following conditions:
- the securities are listed on the official list of a recognised stock exchange
- the shares in the company issuing the securities are so listed
- the company issuing the securities is a 75% subsidiary of a company whose shares are so listed, or from 1 July 2015
- the securities are admitted to trading on a recognised stock exchange in the EEA
- the shares in the company issuing the securities are so admitted to trading
- the company issuing the securities is a 75% subsidiary of a company whose shares are so admitted to trading
For securities acquired before 1 July 2014 they must satisfy the condition that, at the date on which the security is purchased by the ISA manager, the terms on which it was issued either:
- don’t require the loan to be repaid or the security to be re-purchased or redeemed within the period of five years from that date
- don’t allow the holder to require the loan to be repaid or the security to be re-purchased or redeemed within the period of five years from that date, except in circumstances that are neither certain nor likely to occur
‘75% subsidiary’ has the meaning given by section 838 of the Income and Corporation Taxes Act 1988.
For the purpose of the ISA legislation, the European Investment Bank (Banque Européenne d’Investissement) can be regarded as a company. The normal rules on qualifying securities therefore apply to securities issued by the bank.
Similarly, Permanent Interest Bearing Shares (PIBS) issued by UK Building Societies can be regarded as issued by a company. The normal rules on qualifying securities therefore apply to PIBS.
Core Capital Deferred Shares (as defined in the Building Societies (Core Capital Deferred Shares) Regulations SI 460/2013) issued by a UK Building Society can be purchased within an ISA on or after 1 July 2014.
Securities acquired before 1 July 2014 must have a minimum residual term of five years when purchased by an ISA manager. However, for these securities there is no objection to:
- terms that allow the company issuing the securities to redeem the loan, whether to re-finance advantageously or in response to changes to withholding or other taxes
- terms that allow the company issuing the securities, or an associate, to repurchase the securities in the market
- call options, typically exercisable, in the case of Euro-convertible bonds, at the five year point by the company issuing the securities, giving them the right to redeem, subject to the holder’s prior right to convert the bond into the underlying ordinary equity
- other similar terms that allow the company issuing the securities to force conversion by serving a notice of intended redemption when a particular percentage of other holders have converted (to tidy up the issue) or the share price has reached a specified price for a specified interval (to cut the borrowing cost)
- terms that allow the holder to redeem where the borrower defaults, or appears close to insolvency, breaches covenants or other terms written into the bond, changes the nature of its business or exceeds pre-set borrowing limits
While securities acquired before 1 July 2014 must have a minimum residual term of five years when purchased by an ISA manager, the manager is not required to hold the securities for five years.
Managers may find theuseful in order to determine whether a security is a qualifying security. The flowchart relates solely to securities and not other investments that may or may not be qualifying investments.
Government securities are qualifying investments if they’re:
- gilt-edged securities (“gilts”)
- gilt strips
- securities issued by or on behalf of a government of any EEA State
- strips of securities issued by or on behalf of a government of any EEA State
If acquired before 1 July 2014, they must have at least 5 years to run to maturity when purchased by the manager. The 5 year test does not apply to government securities acquired on or after 1 July 2014. A of this is available.
Securities issued by multilateral organisations
‘Multilateral institution’ means an institution that is listed in Part I of Annex 2 to the DAC Statistical Reporting Directive (approved by the Development Assistance Committee of the Organisation for Economic Co-operation and Development).
Securities issued by a multilateral institution are qualifying investments if:
- the security is listed on the official list of a recognised stock exchange, and
- the security satisfies the conditions for securities acquired before 1 July 2014
‘UK UCITS’ means a collective investment scheme authorised under section 31(1)(a) of the Financial Services and Markets Act 2000 that complies with the requirements to be a ‘UCITS scheme’ for the purposes of the Collective Investment Schemes Sourcebook (see in particular COLL 1.2.2).
Units or shares in a UK UCITS, or a part of a UK UCITS, are qualifying investments.
An ‘authorised unit trust’ is a unit trust scheme where an order under section 243 of the Financial Services and Market Act 2000 is in force.
‘Open-ended investment company’, also known as ‘OEIC’, means a company incorporated in the UK to which S236 FSMA 2000 applies.
‘Collective investment scheme’ has the meaning given by section 235 of the Financial Services and Markets Act 2000.
The Financial Conduct Authority (FCA) also authorises collective investment schemes as qualified investor schemes but these do not qualify for the ISA.
Qualifying Non-UCITS retail schemes
Units or shares in a non-UCITS retail scheme (NURS) are qualifying investments if the instrument constituting the scheme provides for redemption of the units or shares at least fortnightly.
NURS, for the purposes of stocks and shares ISAs only, means:
- a collective investment scheme to which, or to whose authorised fund manager and depositary, FCA Handbook COLL 5.1, 5.4 and 5.6 apply
- a non-UK scheme that is recognised by the Financial Conduct Authority under section 270 or 272 of the Financial Services and Market Act 2000 that would be such a scheme if it were a UK scheme
In particular, a NURS operating as a fund of alternative investment funds, also known as a ‘FAIF’, as referred to in COLL, satisfies this definition.
Schemes that apply ‘limited redemption’ (as defined in the COLL section of the FCA Handbook) will not be eligible for an ISA. Nor will any scheme that has an FCA waiver to its normal redemption rules.
But this does not remove firms’ abilities to defer redemption, provided this is within the rules set out in the FCA Handbook.
Shares and securities in investment trusts
Shares in an investment trust are qualifying investments if the investment trust satisfies the requirement for investments.
Securities in an investment trust are qualifying investments if they meet the same conditions as those detailed for securities and before 1 July 2015, the investment trust satisfied the requirement for investments.
A company is an ‘investment trust’ if it is such a trust for the purposes of section 1158 of the Corporation and Taxes Act 2010.
The requirement for investments before 1 July 2015 was satisfied if not more than 50% in value of the investments held by the investment trust are securities that aren’t qualifying securities or government securities.
There is no requirement that any securities held be otherwise eligible for a stocks and shares ISA. For example, the 50% test would not prevent an investment trust from investing more than 50% of its funds in stocks and shares that are not listed on recognised stock exchanges, or long-dated government securities issued by non-EEA states.
Warrants in an investment trust are not qualifying investments unless, exceptionally, they are attached to shares purchased by an ISA manager in the course of a public offer.
Where managers apply for shares in an investment trust using cash within a stocks and shares ISA, they may retain in the ISA any warrants attached to the shares acquired in the course of the public offer.
Any warrants received subsequently (for example, new issues of warrants offered to existing shareholders only) cannot be held in a stocks and shares ISA. They must either be sold or re-registered into the investor’s own name (see changes to investments held in a stocks or shares ISA).
‘Recognised UCITS’ means a collective investment scheme. It is an undertaking established in the UK or an EEA State. This is within the meaning given by section 236A of the Financial Services and Markets Act 2000. And it is a recognised scheme for the purposes of Part 17 of that Act.
This includes an undertaking established in Gibraltar which is a UCITS under the law of Gibraltar. This implemented Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009, on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities.
The EEA consists of the 27 member states of the EU, plus Iceland, Liechtenstein and Norway. A list of the member states of the EU is available.
Shares emerging from a Schedule 3 SAYE option scheme or a Schedule 2 Share Incentive Plans
Shares acquired by employees, which have emerged from a Schedule 3 SAYE option scheme or a Schedule 2 Share Incentive Plan are qualifying investments for stocks and shares ISAs and may be transferred directly into a stocks and shares ISA (see subscription by transfer of shares). This applies even where the shares would not otherwise be qualifying investments (for example, because they are not listed on a recognised stock exchange).
UK regulation requires securities to be electronically settled in CREST. For companies registered outside the UK, this is achieved through a depository interest mechanism. The depository interest is effectively an electronic ‘wrapper’ around the ordinary share, to facilitate securities to be held electronically rather than in paper form. A company applies for depository interests representing ordinary shares to be admitted to CREST with effect from its admission to the market.
When checking the details of international shares officially listed on the London Stock Exchange (LSE) or admitted to trading on the Alternative Investment Market, known as ‘AIM’, the descriptor of each security will identify the listed/traded instrument e.g. ordinary shares. Reference to ‘(DI)’ in the descriptor simply confirms that the shares are settled electronically through CREST, and therefore is not relevant in determining ISA eligibility (because it is the shares that are listed or admitted to trading, not the depository interest).
Depositary receipts, American depositary receipt and American depositary share
Depository receipts are a type of security and should not be confused with depositary interests.
A depository receipt can be held in an ISA providing the underlying shares represented by the depository receipt are in the beneficial ownership of the holder and are themselves ISA qualifying. It is irrelevant for ISA purposes whether the depository receipt is listed or traded on a recognised stock exchange.
Where the listed or traded instrument is a depository receipt, for example a global depository receipt, the descriptor will clearly state this. This can be checked on the UKLA Official List for listed investments.
An American depositary share is a vehicle for foreign corporations to list their ordinary equity on an American stock exchange. Foreign corporations are not permitted to make direct secondary listings on American stock exchanges, so this form of indirect ownership has been devised. American depositary shares enable US investors to buy the securities of a foreign company without the accompanying risks or inconveniences of cross-border and cross-currency transactions.
American depositary shares are dollar denominated and each share represents one or more underlying shares in the foreign corporation. An American depositary receipt is a physical certificate evidencing ownership in one or several American depositary shares. The terms are often used interchangeably.
The decision of the First Tier Tribunal in the Stamp Duty Reserve Tax case of HSBC Holdings and Bank of New York Mellon v Commissioners for HMRC, UKFTT 163 (TC) has shown that in some cases where an American depositary receipt is involved, beneficial ownership may not rest with the underlying investor.
Where a depository receipt is issued in the UK the HMRC view is that the holder of a depository receipt is the beneficial owner of the underlying investment(s), so the depository receipt can be a qualifying investment.
Where a depository receipt is issued outside the UK the question of whether the holder of the depository receipt is the beneficial owner of the underlying investment(s) will be determined by reference to the law of the territory in which the depository receipt is issued. Information on beneficial ownership may be provided to investors by the depository. Where the relevant law means that the holder of a depository receipt is not the beneficial owner of the underlying investment(s), the depository receipt cannot be a qualifying investment that can be held in a stocks and shares ISA.
Where beneficial ownership of the underlying investment(s) cannot conclusively be determined by reference to the law governing the arrangements relating to the issue of the depository receipts, for tax purposes HMRC will continue to determine beneficial ownership according to its understanding of the principles of UK law. This means that HMRC will continue to apply its longstanding practice of regarding the holder of a depository receipt as holding the beneficial interest in the underlying investment(s).
ISA managers should therefore check the terms & conditions and any other documentation related to the depository receipt for any reference to the beneficial ownership of the underlying investment(s). In the absence of any conclusive information to show that the holder of the depository receipt is not the beneficial owner of the underlying investment(s), the ISA manager can assume that the holder of a depository receipt is the beneficial owner, so the depository receipt can be a qualifying investment.
Where the holder of the depository receipt is the beneficial owner of the underlying investment(s), a practical test that managers can apply to determine whether the depository receipt is a qualifying investment is to look through the depository receipt to the underlying investment(s) represented by the depository receipt. This might require looking through intermediaries. If all the underlying investments (other than cash) would be qualifying investments for a stocks and shares ISA if held directly by the investor, the depository receipt will be a qualifying investment.
If the investor holds an American depositary shares or American depositary receipt that is traded on a US stock exchange the underlying investment is the shares represented by the American depositary shares or American depositary receipt. If these shares are officially listed on a recognised stock exchange, the American depositary shares or American depositary receipt will be a qualifying investment for stocks and shares ISA.
In some cases the investor cannot hold shares directly, for example, when the shares are issued in the form of a Global Note. The test should then be applied as if the investor were capable of holding the shares.
Shares emerging from a Schedule 3 SAYE option scheme and a Schedule 2 Share Incentive Plan can be transferred to a stocks and shares ISA. Depository interests representing such shares can also be transferred into an ISA. This includes the case where the shares are converted to DIs before they emerge from the scheme. The 90-day transfer period applies to depository interests in the same way as to shares (see Time limit for transfer of shares from Schedule 3 SAYE option scheme, approved profit sharing schemes and Schedule 2 Share Incentive Plans.
The ISA regulations list investments that can be held in an ISA. They do not list those that cannot be held. In the same way, we cannot produce a complete list of depository interests that do not qualify. The following lists a few depository interests that would not qualify:
- depository interests representing short term loan notes
- depository interests representing cash
- depository interests representing a basket of investments where any of the investments would not qualify for an ISA
An investor’s cash subscription and any other cash held in a stocks and shares ISA may be held only in sterling (please see where manager is a European Institution) and must be deposited in one of the following that is designated as an ISA account:
- an account with a deposit-taker
- a deposit account or a share account with a building society
In practice, managers can operate a single account – which may also hold other savings products, such as cash ISA, feeder fund and current account balances – provided that both:
- the account is designated as an ISA account
- the monies relating to each investor’s ISA are recorded and can be accounted for separately
Where a manager is a European Institution or relevant authorised person, cash may be held in the currency of the EEA state in which he has his principal place of business.
Cash may be held in an ‘adult’ stocks and shares ISA, and before 1 July 2014, can only be held for the purpose of investment in qualifying investments.
Where, before 1 July 2014, a manager believes that cash in an ‘adult’ stocks and shares ISA is not being held for the purpose of investment in qualifying investments he should follow the guidance on uninvested cash held in stocks and shares ISA.
Investors are not liable to UK income tax on interest paid on cash on deposit held in a stocks and shares ISA.
Units in collective investment schemes specified as stakeholder products
Units in a collective investment scheme specified as a stakeholder product by regulation 5 of the Stakeholder Products Regulations are qualifying investments.
Stakeholder Products Regulations means the Financial Services and Markets Act 2000 (Stakeholder Products) Regulations 2004 (SI 2004/2738).
Shares being brought to listing
Managers may apply for shares being brought to listing on an investor’s behalf, using cash from within a stocks and shares ISA provided the shares:
- are being issued in a public offer
- will be qualifying shares within 30 calendar days of the date on which they are allotted or allocated
- are not allocated in connection with the allocation of other shares, securities or units
Since 6 April 2014, managers can apply for shares in qualifying investment trusts that are about to be listed or admitted to trading.
A public offer is an offer open to the public at large. It includes an ‘offer for sale’ or an ‘offer for subscription’.
It doesn’t include:
- an intermediaries offer
- a placing
An ‘offer for sale’ is an invitation to the public by, or on behalf of, a third party to purchase securities of the issuer. It may be in the form of an invitation to tender at or above a stated minimum price.
An ‘offer for subscription’ is an invitation to the public by, or on behalf of, an issuer to subscribe for securities of the issuer. It may be in the form of an invitation to tender at or above a stated minimum price.
An ‘intermediaries offer’ is a marketing of securities by means of an offer by, or on behalf of, the issuer to intermediaries for them to allocate to their own clients.
Where shares are offered through a limited number of intermediaries but any member of the public is able to apply for shares using the named intermediaries, the offer is open to the public at large and will be treated as a public offer rather than an intermediaries offer.
A ‘placing’ is a marketing of securities to specified persons or clients of the sponsor or any securities house assisting in the placing, which does not involve an offer to the public or to existing holders of the issuer’s securities generally.
Shares paid for in instalments
Managers must meet any instalment due after the shares are in a stocks and shares ISA from funds within that ISA, (possibly by making a cash subscription to that ISA). The instalment payments may not be funded from cash held in any other ISA, or from cash outside the ISA.
Where an investor has subscribed the maximum for the tax year in which a subsequent call is due, ISA managers will have to sell sufficient investments within the stocks and shares ISA to pay the call.
Changes to investments held in a stocks and shares ISA
The most common examples of a change to an investment are:
- capital reorganisations (other than a rights issue or bonus issue)
- rights issues
- bonus issues
Investors may take up any offer to shareholders in respect of investments held in a stocks and shares ISA. Whether the resulting investments can be held in the ISA will depend on whether they are qualifying investments.
Where the new investments are qualifying investments, they can remain in a stocks and shares ISA.
Where the new investments are not qualifying investments, managers must, within 30 calendar days of the date on which they became non-qualifying investments, either:
- sell them (in which case the proceeds can remain in the stocks and shares ISA)
- transfer them to the investor to be held outside the ISA.
Complex reorganisations often involve more than just the issue of one set of new investments. There could, for example, be a bonus issue of shares, which are replaced in turn by other shares, which are then sold, or converted to other investments. If the intermediate investments are not qualifying investments for a stocks and shares ISA then, strictly, the final investments, or cash proceeds, cannot be held in a stocks and shares ISA even if the final investments themselves are eligible.
However, where ineligible investments are issued as an intermediate stage, and those investments are short-lived, or are automatically replaced by cash, HMRC will consider whether it is possible to look through the intermediate stages and apply the guidance on qualifying investments to the initial and final investments alone. If a reorganisation involves intermediate ineligible investments managers should submit full details to firstname.lastname@example.org, and if possible well before the planned reorganisation date.
Where there are income and capital options available to an ISA investor, the ISA manager can select the income option (whether by choice or default) if any resulting (non-qualifying) deferred shares will be either cancelled or purchased for a negligible amount at some stage in the future (albeit not within the usual 30 days).
Rights issues and other offers to shareholders
ISA managers may use only one of the following to take up rights issues and other offers for qualifying investments within the ISA:
- cash within a stocks and shares ISA
- further cash subscribed within the subscription limits
An investor may give an ISA manager sufficient cash to take up the offer outside the ISA, provided the ISA manager immediately transfers the investments to the investor to be held outside the ISA.
Any proceeds received from lapsed rights in respect of an investment held in an ISA (or a Junior ISA (JISA)) may be paid into the ISA (and must be paid into the JISA). The payment is not a subscription and does not count towards the annual subscription limit.
Managers may add to a stocks and shares ISA, bonus issues of shares or units received in respect of an investment held in the ISA, provided they are qualifying investments. Such bonus issues do not count towards the ISA subscription limit.
Where they are non-qualifying investments, managers should follow the guidance within changes to investments held in stocks and shares ISAs.
However, where the bonus issue is derived from, and the shares are of the same type as, those transferred from a Schedule 3 SAYE option scheme, approved profit-sharing scheme or a Schedule 2 Share Incentive Plan, these may be added to the ISA even though they are non-qualifying.
Recognised Stock Exchanges
‘Recognised stock exchange’ means:
- any market of a recognised investment exchange which is for the time being designated as a recognised stock exchange for the purposes of Section 1005 of the Income Tax Act 2007 by an order made by the Commissioners for HMRC
- any market outside the UK which for the time being so designated
It includes the LSE and any such stock exchange outside the UK as is designated in an Order of HMRC.
You can view a list of stock exchanges that have been designated as ‘recognised stock exchanges’.
The phrase ‘listed on a recognised stock exchange’ in respect of shares and securities is now defined at section 1005(4) Income Tax Act (ITA) 2007 and means shares and securities which are admitted to trading on that exchange and included in the official UK list maintained by the Financial Conduct Authority as the UK Listing Authority or are officially listed in a qualifying country outside the UK in accordance with provisions corresponding to those generally applicable in EEA states.
Interaction with other tax reliefs
Company shares which became newly eligible for ISA inclusion as a result of this change will remain eligible for the Enterprise Investment Scheme (EIS), the Venture Capital Trust (VCT) scheme, and Inheritance Tax Business Property Relief (BPR).
However, if an investor already holds company shares which are traded on a newly qualifying market these cannot simply be moved into an ISA. If an investor sells an investment that currently qualifies for EIS, VCT or BPR, and their ISA manager uses the proceeds to purchase a replacement holding of the same shares for investment in an ISA, the effect would be that:
- for EIS, the sale of the original holding will be a disposal for the purpose of the provisions for withdrawal of EIS Income Tax reliefs - The new holding will qualify for EIS relief only if it is new shares in a qualifying company
- for VCT, the sale of the original holding will be a disposal for the purpose of the provisions for the recovery of VCT tax reliefs - The new holding will qualify only for dividend relief and Capital Gains Tax exemptions under the VCT rules
- for BPR, there would be two ownership periods, one for the original holding and one for the ‘new’ holding in the ISA wrapper - Provided the combined ownership period was more than two years, BPR would be available on the replacement holding