With most investors eager to make the most of their reset annual ISA allowance when the new tax year begins, it’s understandable that some will contribute the maximum £20,000 within weeks, or even days.
With most investors eager to make the most of their reset annual ISA allowance when the new tax year begins, it’s understandable that some will contribute the maximum £20,000 within weeks, or even days.
Whilst exploring ISA options in advance and being ready to subscribe funds as soon as possible is positive – as it means capital is protected by the tax-efficient ISA wrapper for as long as possible – it leaves investors with, in some cases, almost another year until the ISA allowance next resets.
But even after maxing out the annual ISA allowance for the year, there are other ways to invest in a new ISA product before the next tax year rolls around – by transferring funds already within an ISA from a previous year.
ISA transfers allow the movement of funds within the ISA wrapper without contributing towards the ISA allowance
ISA transfers are arguably one of the most beneficial features of an ISA outside of the tax free returns. Whilst some investors will be unaware of them and their advantages, others are utilising them in a way that helps to maximise potential returns.
Read more:![the complete guide to ISA transfers]()
Put simply, an ISA transfer is the formal process of moving funds from one ISA to another. This could be from one type of ISA to another – such as a Cash ISA to an Innovative Finance ISA (IFISA), assuming the investor has the appropriate appetite for risk and has received advice from an independent financial advisor – or to the same type of ISA with a different provider.
Because ISA transfers don’t require the removal of funds from the ISA wrapper, funds retain their tax-free status throughout the transfer process – provided the formal ISA transfer process has been followed – and do not contribute towards the current year’s annual ISA allowance.
The result of this is additional opportunities for investors to invest into ISA products suited for their portfolio requirements today even after using the entirety of their ISA allowance for the tax year.
For example, an investor who has decided to open and subscribe £10,000 to a Stocks and Shares ISA and £10,000 to an IFISA in 2021/22 – and has therefore utilised the whole of their current £20,000 ISA allowance – could choose to transfer a further £5,000 (or £50,000 - there are no limits to transfers) to the IFISA that was invested into a Cash ISA in the tax year previous.
Technically, this would mean the investor has subscribed £25,000 in 2021/22. However, as ISA transfers do not count towards the annual ISA allowance, they would not have actually exceeded their maximum £20,000 for the year, yet would have the £25,000 readily available to invest within their IFISA.
Keeping funds within the ISA wrapper means they can be used again without contributing towards the ISA allowance
The aforementioned ISA transfers are not the only method of investing into ISAs without using your current ISA allowance. It is also possible to keep funds within the ISA wrapper at the end of a fixed term period on products such as IFISAs, meaning they can be reinvested without contributing towards the ISA allowance.
When funds are withdrawn from an ISA, they immediately lose their tax-free status. This means if you were to reinvest them into an ISA – no matter how soon after the initial withdrawal – the amount would be deducted from your current ISA allowance.
On the other hand, if the funds are never removed from the ISA wrapper, they can be reinvested and will still be classed as a contribution from the ISA allowance in the year they were originally subscribed.
As an example, an experienced investor who subscribed £10,000 via an IFISA to CARLTON Bonds Series Two (using their 2019/2020 ISA allowance) could reinvest their original capital, and any gains, into CARLTON Bonds Series Five and Six when the fixed term period ends on 31st March 2021 - all without affecting their current 2020/21 ISA allowance.
But for investors unsure of what they wish to do with their funds at the end of a fixed term, there is also the option to do nothing, leaving them uninvested and generating no return, but retaining their tax-free status ready to be reinvested – without having an affect on the ISA allowance – when the time is right.
Investing into an ISA without using your ISA allowance
When possible, utilising your annual ISA allowance in full each year is crucial to maximising returns and taking full advantage of an ISA’s tax-efficient benefits.
And in order to truly make the most of all an ISA has to offer, being aware of the methods which could allow you to save or invest what could be considerably more than your £20,000 annual ISA allowance each tax year is key.
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