Are Stocks and Shares ISAs Tax Free?

All UK residents aged 18 or over have an annual ISA allowance which can be invested into stocks and shares. You can invest up to £20,000 (for the tax year 2020/2021) into an investment ISA.

For most of us, the money invested is likely to be from taxed income. Once invested inside an ISA wrapper, your money grows free of tax and you gain tax advantages when you’re ready to withdraw and spend it too.

This brief guide explains the tax rules regarding investment ISAs, but the same rules will apply if you opt for a cash ISA too.

Read on for a complete overview, or click a link to jump ahead:

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How are stocks and shares ISAs taxed?

With a cash ISA you guarantee you’ll never be taxed on any interest you make. If you use your ISA wrapper to make an investment, there are three distinct tax advantages:

  • No tax on profit
    No capital gains tax (CGT) is taken on any profit you make from increasing share prices. If you sell a share for more than you bought it for, you make a profit. If you invested outside an ISA, any profits above the annual CGT allowance (£12,300 for 2020/21) you would be subject to 10% tax if you’re a basic-rate taxpayer or 20% if you’re a higher or additional-rate taxpayer.
  • No tax on interest earned on bonds
    You get to keep all the interest
  • No tax on dividend income
    If you invested outside an ISA, you would have a £2,000 dividend income allowance, but above this amount you would have to pay 7.5%, 32.5% or 38.1% depending on your taxpayer status

The government adjusts the amount you can invest in an ISA on an annual basis, the same is true of the tax rates charged on income, capital gains and inheritance tax.

We work with independent financial advisers who keep abreast of changing tax rules and global market trends. If you wish to speak to an investment expert and find out the best way you could use your annual ISA allowance, get in touch for a free, no-obligation chat.

Is income tax-free?

Yes, any income you get from your investment ISA is entirely free of income tax. This means you will not be subject to income tax on any dividends or interest you receive from the money you hold inside an ISA wrapper.

This unique advantage makes ISAs particularly useful for retirement planning. Many people prefer the simplicity and flexibility offered by ISAs over the complicated rules and regulations surrounding personal pension plans.

ISAs and inheritance tax

While there are many tax advantages to holding investment ISAs, they can be subject to inheritance tax (IHT), in some circumstances. If your spouse inherits your ISA the tax advantages remain intact and will not be subject to IHT. On top of this, your spouse also gets a one-off ISA allowance in addition to the ISA allowance they get automatically.

This additional ISA rule is called the “additional permitted subscription” and means that when your ISA savings get passed on to your spouse, they are able to save them into an ISA and protect them from being taxed on income, dividends or capital gains.

In order to benefit from the additional permitted subscription, your spouse or civil partner must make a claim within three years of your death, or 180 days from when the estate administered was completed.

Some providers offer inheritance ISAs, catering specifically to people who inherit an ISA allowance. To find out more about the additional ISA allowance and your tax position, talk to one of the expert investment advisors we work with.

Are ISAs entirely exempt from inheritance tax?

No. If you die and your partner doesn’t inherit your ISA(s), they will form part of your estate. Your ISA will end when the executor of your estate closes it or on completion of your estate administration. If neither of these things happen, your ISA will be closed by the provider three years and one day after your death.

Up until the date your ISA or ISAs are closed they will remain free of income tax and capital gains tax. Once closed, the money will form part of your estate and will be subject to inheritance tax.

The inheritance tax threshold for the current tax year (2020/21) is £325,000, anything above this amount will be taxed at 40%. The full estate includes property, money and possessions.

Your estate will not be subject to IHT if the value of your entire estate is less than £325,000 or you leave everything to your spouse, civil partner, amateur community sports club or a charity.

Speak to an expert

ISAs have many tax advantages which can have a significant impact on your savings and investments during your lifetime. The key to making the most of any investment is where you invest and how well your investments perform.

To make sure you’re taking full advantage of your annual ISA allowance, talk to one of the independent financial advisors we work with.

Call 0808 189 0463 or make an enquiry for a free, no-obligation chat. We’ll match you with one of the investment experts we work with who will be happy to answer your questions and help you with any aspect of your financial planning requirements.

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