Most investors now understand the potential of the tax-free ISA, but many will be wondering how many ISAs you can actually have – as holding more than one could be crucial for building a diversified ISA portfolio which has the best chance of meeting your goals.
The simple answer to this question is: as many as you want. But there are some complexities, such as the number of ISAs you are able to open within one tax year, the answer to which is four – one of each type of Adult ISA (Cash ISA, Stocks and Shares ISA, Innovative Finance ISA (IFISA) and Lifetime ISA).
The ISA has long been one of the most generous tax incentives available to savers and investors in the UK, with all investments held within the tax wrapper not liable for income tax or Capital Gains Tax (CGT). It's therefore no surprise that many investors aim to take utilise the annual ISA allowance to its maximum each year. This is particularly true now, as impending taxation changes announced in the Chancellor's Autumn Statement threaten to erode investors' capital growth.
To be able to make the most of ISAs and the ISA allowance, it's important to have an in-depth understanding of how to do so. And when considering ISA options, two of the most common questions asked are:
1. How many ISAs can I have?
2. How many ISAs can I open in one tax year?
How many ISAs can I have?
You can, in theory, have as many ISAs as you would like. However, in practice, this is not an ideal method. For example, if you were to open a new ISA with different providers each year, you could soon end up with a portfolio that may become difficuly to track and manage.
Therefore, the key questions is:
How many ISAs can I open in a single tax year?
This is the most important point – get it wrong and it will affect your tax-free returns.
The current tax year runs from 6th April 2022 to 5th April 2023, meaning there's only a few short weeks left. Each tax year, UK-based savers and investors over 18 years old benefit from an annual ISA allowance, which is £20,000 for 2022/23 and has been frozen at this amount for 2023/24.
In a single tax year, this allowance can either be invested into one type of ISA with one provider, or you can choose to split your allowance across four different types of ISA.
Splitting your ISA allowance across multiple types of ISA can be incredibly useful. This approach allows investors to build a diversified ISA portfolio and structure it in a way that meets their overall investment objectives and appetite for risk.
As an example, investor #1, a cautious investor, may choose to subscrive their full £20,000 allowance to a Cash ISA. The interest rate may not be particularly attractive – particularly as UK inflation rose to 10.4% in February – but their returns are guaranteed.
On the other hand, investor #2, an experienced investor, may choose to incorporate more risk into their portfolio for the potential of a higher return. To do so, they may split their £20,000 allowance, for example:
1. £5,000 in a Cash ISA with a guaranteed return of circa 3% p.a.
2. £5,000 in a Stocks and Shares ISA with a target return of circa 5% p.a. This will be subject to the volatility of the equities market.
3. £10,000 in an IFISA with a target return of circa 9% p.a.
It's important to remember that each of the above ISA products have different risk profiles, and what is suitable for you will be dependent on a number of factors such as age, investment objectives and risk appetite.
Understanding your ISA allowance
The Adult ISA allowance has been on a consistent upward trajectory. It rose from £15,240 to £20,000 in 2017/18 and has been frozen at that figure ever since. This is clearly a generous allowance, and using it to its maximum where possible is an important consideration for investors.
Provided your total ISA subscriptions don't exceed the annual ISA allowance, the ability to split the allowance across ISA products results in the capability to reap the individual benefits of each ISA. This allows for a strong level of diversification within your ISA portfolio, by enabling you to gain exposure to a variety of assets – from the equities market with a Stocks and Shares ISA, to property bonds with an IFISA.
The CARLTON Bonds product is available exclusively to experienced investors who are classified as either sophisticated investors, high-net-worth individuals or professional investors and have the knowledge and experience to make their own investment decisions. Investments are high risk and illiquid, your capital is at risk and returns are not guaranteed. Bonds are not protected by the Financial Services Compensation Scheme (FSCS).
Originally published 12th February 2020, updated 6th May 2020.