Guidance

Who can invest in an ISA if you're an ISA manager

Check if an investor qualifies for an ISA and what to do when an investor dies.

Who can subscribe to an ISA?

To be eligible to subscribe to an ISA an investor must be an individual, aged 16 or over (if subscribing to a cash ISA), or 18 or over (if subscribing to a stocks and shares, innovative finance ISA, or a Lifetime ISA).

For Lifetime ISAs other age rules apply to payments into the account; for example an individual may only open a Lifetime ISA under the age of 40 but they may make payments until they reach 50.

The subscriber should be resident in the UK or, if not so resident, be performing duties as a Crown employee serving overseas and paid out of the public revenue of the UK (typically a serving member of the armed forces, or a diplomat), or be married to, or in a civil partnership with, such a person (the residence qualification). Non-resident investors can, however, make additional permitted subscriptions, flexible ISA replacement subscriptions, defaulted cash subscriptions, defaulted investment subscriptions and Help to Buy ISA reinstatement subscriptions.

For Lifetime ISAs, only a defaulted Lifetime ISA subscription or a returned Lifetime ISA withdrawal after the failure of a first time residential purchase may be made by a non-resident investor.

The investor will not have subscribed to another ISA of the same type in that tax year otherwise than by way of additional permitted subscriptions, flexible ISA replacement subscriptions, defaulted cash account subscriptions to a cash ISA and Help to Buy ISA reinstatement subscriptions (but see what amounts can be transferred where an ISA is transferred to an ISA of the other type, for example, cash to stocks and shares or stocks and shares to cash).

For a Lifetime ISA, an investor can only pay into more than one Lifetime ISA in a tax year to make a defaulted Lifetime ISA payment or to return a Lifetime ISA withdrawal after the failure of a first time residential purchase.

The investor should not have exceeded the overall subscription limit or, in the case of a Lifetime ISA, the Lifetime ISA payment limit.

The residence qualification

To subscribe to an ISA that is not a Lifetime ISA - other than by way of additional permitted subscriptions, flexible ISA replacement subscriptions, defaulted subscriptions and Help to Buy ISA reinstatement subscriptions - the investor must meet the residence qualification described in who can subscribe to an ISA. Managers should note that husbands, wives and civil partners do not necessarily have the same residence status.

To make payments to a Lifetime ISA - other than a defaulted Lifetime ISA subscription or a returned Lifetime ISA withdrawal after the failure of a first time residential purchase - the investor must meet the residence qualification described in who can subscribe to an ISA.

The UK means England, Wales, Scotland and Northern Ireland. In particular, it does not include the Channel Islands or the Isle of Man.

Investors must declare in their applications to subscribe that they meet the residence qualification.

Investors are also under an obligation to notify the ISA manager if they cease to meet the residence qualification because they have become non-resident, have ceased to perform duties as a Crown employee serving overseas, or have ceased to be married to, or in a civil partnership with, such a person.

An existing ISA need not be closed, but no further subscriptions to the ISA can be made - (for accounts other than a Lifetime ISA) other than by way of additional permitted subscriptions, flexible ISA replacement subscriptions, defaulted subscriptions, defaulted investment subscriptions and Help to Buy ISA reinstatement subscriptions - unless and until the investor meets the residence qualification again.

For a Lifetime ISA, an existing account need not be closed but no further payments can be made - other than a defaulted Lifetime ISA subscription and a returned Lifetime ISA withdrawal after the failure of a first time residential purchase.

Further guidance is below for cases where the residence position is not confirmed.

Under the new residence rules, from 6 April 2013 an individual is either UK resident (regardless of whether split year treatment applies) or not resident for the whole of a tax year. The individual can determine their status by using the RDR3: Statutory Residence Test.

If they are resident they can apply for an ISA and they will be able to subscribe to that ISA for the whole of the tax year. If they are not resident in a later tax year, they can no longer subscribe to the ISA made - other than by way of additional permitted subscriptions, flexible ISA replacement subscriptions, defaulted subscriptions, defaulted investment subscriptions and Help to Buy ISA reinstatement subscriptions - until they are again UK resident.

For a Lifetime ISA, an individual who is not resident cannot make payments to an account - other than a defaulted Lifetime ISA subscription and a returned Lifetime ISA withdrawal after the failure of a first time residential purchase.

If an investor has a continuous application in place and they have been non-resident, there will always be a gap year as the period of non-residence must last for a whole tax year and no subscriptions will be possible for that gap year. If the investor again becomes UK resident at a later date they will need to make a fresh ISA application. However, the requirement to make a fresh application does not apply to Lifetime ISAs as the declaration contained within the application form has effect for each year in which the individual makes a payment to the account.

When an ISA manager is notified of a new address overseas, but the investor has not made a declaration that he is non-resident, the ISA manager can continue to accept subscriptions on the basis of the existing (resident) declaration for the remainder of the tax year of leaving the UK. Subscriptions should not be accepted for the following tax year - (for accounts other than Lifetime ISAs) other than by way of additional permitted subscriptions, flexible ISA replacement subscriptions, defaulted subscriptions, defaulted investment subscriptions and Help to Buy ISA reinstatement subscriptions - until the investor has confirmed in writing that they expect to be resident in the UK, where appropriate by completing a fresh application (required except for a Lifetime ISA).

As managers will need to flag that subscriptions must not be accepted in the following tax year, they can adopt one of 2 possible approaches.

From the date that they receive notification of the non-UK address, they can tell the investor that any further subscriptions will be refused unless the investor confirms they expect to be resident in the UK for the tax year of departure.

Or they can tell the investor they will continue to accept subscriptions for the tax year of departure unless the investor tells them they expect to be not resident for the tax year.

For a Lifetime ISA, an individual who is not resident cannot make payments to an account - other than a [defaulted Lifetime ISA subscription] and a returned Lifetime ISA withdrawal after the failure of a first time residential purchase.

If the investor declares in-year that he is not resident, all subscriptions to an account - other than to a Lifetime ISA - other than additional permitted subscriptions, flexible ISA replacement subscriptions, defaulted subscriptions, defaulted investment subscriptions and Help to Buy ISA reinstatement subscriptions made in that year must be removed from the ISA. These cannot be reinstated after the year end if the investor later establishes they were, in fact, resident.

For Lifetime ISA, the above rule applies for all payments made to an account in that year - other than defaulted Lifetime ISA subscription and a returned Lifetime ISA withdrawal after the failure of a first time residential purchase. However, the ISA manager must first contact HMRC before taking voiding action. In addition, any Lifetime ISA bonus received for that year must be returned to HMRC.

If the investor informs the manager that they left the UK in an earlier tax year and became:

For Lifetime ISAs, the above rule applies for all payments made to an account in those tax years - other than defaulted Lifetime ISA subscription and a returned Lifetime ISA withdrawal after the failure of a first time residential purchase. However, the ISA manager must first contact HMRC before taking voiding action. In addition, any Lifetime ISA bonus received for that year must be returned to HMRC.

If the investor declares in-year that he expects to be non-resident, as this is not a categorical declaration of non-residence no subscriptions should be removed (voided). Only if the investor subsequently confirms that they are non-resident should any subscriptions - other than additional permitted subscriptions, flexible ISA replacement subscriptions, defaulted subscriptions, defaulted investment subscriptions and Help to Buy ISA reinstatement subscriptions - made in that year be removed.

For Lifetime ISA the above rule applies for all payments made to an account in that year - other than defaulted Lifetime ISA subscription and a returned Lifetime ISA withdrawal after the failure of a first time residential purchase. However, other than in tax year 2017 to 2018 (due to the 2017 to 2018 rule) the ISA manager must first contact HMRC before taking voiding action; this is because the account may have received a government bonus payment.

Many ISA managers are large organisations with a number of different departments carrying out different functions. Provided ISA managers do not place unnecessary anything in the way of communication between departments, HMRC will not regard information that has not reached the department responsible for operating the scheme as information in the possession of the ISA manager.

Investors who are unsure of their residence status should refer to the RDR3: Statutory Residence Test.

An online residence indicator is available.

The ‘one ISA of each type per year’ rule

From 6 April 2017 investors can subscribe in each tax year to one cash ISA, one stocks and shares ISA, one innovative finance ISA and one Lifetime ISA.

Investors cannot subscribe to 2 (or more) cash ISAs, 2 (or more) stocks and shares ISAs, 2 (or more) innovative finance ISAs, or 2 or more Lifetime ISAs in the same tax year.

Where the investor transfers current year subscriptions from one type of ISA to another the subscriptions are treated as if they were made to the receiving ISA. For example, if current year stocks and shares subscriptions are transferred to a cash ISA, they are treated as if they made to the cash ISA so the investor is free to subscribe to a stocks and shares ISA following the transfer - subject to the overall subscription limit.

Prior to 6 April 2017, in each tax year, ISA investors could subscribe to one cash ISA, one stocks and shares ISA, and one innovative finance ISA.

They could not subscribe to 2 (or more) cash ISAs, 2 (or more) stocks and shares ISAs, or 2 (or more) innovative finance ISAs in the same tax year.

The following do not count as subscriptions to accounts other than Lifetime ISA for the purpose of the ‘one ISA of each type per tax year’ rule:

In the case of a flexible ISA, withdrawals of current year subscriptions, can effectively be replaced in any current year ISA, but cannot breach the ‘one ISA of each type per tax year’ rule.

For Lifetime ISA, only a defaulted Lifetime ISA payment and a returned Lifetime ISA withdrawal after the failure of a first time residential purchase do not count for the purpose of the ‘one Lifetime ISA per tax year’ rule.

Investors’ tax returns

Investors do not have to declare income or gains in an ISA on their tax returns, unless the ISA subscription has been made void.

Capital losses in respect of ISA investments are disregarded for the purposes of Capital Gains Tax.

Corresponding deficiency relief is not allowed on life insurance policies within an ISA.

Death of an investor on or before 5 April 2018

Interest, dividends or gains in respect of investments in an ISA that arise after the date of death of the investor are not exempt from tax (but see death of an investor). However, there is no loss of exemption on interest or dividends payable or gains which arise on disposals made before the date of death of an investor.

A life insurance policy within an ISA will pay out on the death of the investor. The policy remains part of ISA business until a valid claim is made. Any interest paid by the insurer because of a delay in paying the claim is not exempt from tax and must, where appropriate, be paid or credited under deduction of tax at the basic rate.

Death of an investor on or after 6 April 2018

Any ISA held will be designated a ‘continuing account of a deceased investor’ and will remain so until the earlier of:

  • completion of the administration of the deceased’s estate
  • closure of the account
  • third anniversary of the death of the account investor

There is no requirement for an ISA manager to check with the executors of a deceased investor if/when the administration of the investor’s estate has completed.

No subscriptions, including replacement flexible subscriptions, can be made into a ‘continuing account of a deceased investor’. However, active management of the investments already held within the account may continue subject to the terms and conditions of the account.

Funds held within a continuing account of a deceased investor continue to benefit from ISA tax advantages. Any interest, dividends or gains in respect of investments in a continuing account of a deceased investor are exempt from tax.

A life insurance policy within an ISA will pay out on the death of the investor. The policy remains part of ISA business until a valid claim is made. If interest is paid into the ISA by the insurer because of a delay in paying the claim the interest will be exempt from tax and can be paid or credited without deduction of tax. If the death proceeds are held outside of the deceased’s ISA pending settlement of the claim then any interest paid by the insurer should have tax deducted at the basic rate of tax.

Personal representatives cannot apply to change a stocks and shares ISA into a cash ISA or vice versa with the same ISA manager. They cannot request the transfer of a ‘continuing account of a deceased investor’ to an alternative ISA manager. However, these accounts can be included as part of a bulk transfer when an ISA manager ceases to qualify or otherwise transfers their ISA book.

If, after a period of 3 years, the administration of the account is ongoing and the account has not been closed, the account will cease to be a continuing account of a deceased investor. In these circumstances, on the next working day following the third anniversary of the deceased’s death, the ISA manager must remove the ISA wrapper from the account and all subsequent income or gains will then become taxable in the hands of the estate.

Published 5 April 2018