Closing an ISA

Investors have the right to close their ISAs whenever they want and you must include this right in your ISA terms and conditions.

Requests do not need to be in writing. You can accept a request to close an ISA from a third party, but you should make sure the request is valid.

You may close an ISA where terms and conditions allow. For example, you may state in your terms and conditions that you will close an ISA where the balance falls below a particular level.

If an investor wants to close an ISA, you may leave it open:

• until the date HMRC pays the final claim to tax
• until the final claim is made for a Lifetime ISA
• beyond the 90 day period after the purchase of first time residential property — this is in case funds are returned if the purchase fails

You can pre-fund Income Tax that is reclaimable from HMRC to the ISA. To do this:

• use your own resources to supplement income received during the closure period
• make sure the amount you supplement is equal to the tax on that income
• do this before receiving the tax from HMRC

You cannot pre-fund the government bonus on a Lifetime ISA. Read more information in the ‘Pre-funding UK Income Tax reclaimable from HMRC to an ISA’ section of the How to manage an ISA investment fund guide.

You may re-open an ISA where it was closed earlier in the same tax year if the investor wants to either:

• resume subscriptions
• make flexible ISA replacement subscriptions for funds from a previous year that they withdrew in the current year

If you re-open the ISA, you must report all subscriptions made in the year, not just those made after you re-open the account. Read more information about annual returns of information.

An ISA does not have to be closed because the investor no longer satisfies the residence qualification. The ISA can remain open and it can be transferred to another ISA manager. However, until the investor satisfies the residence condition again, they can only subscribe to the ISA, by using one or more of the following:

• additional permitted subscriptions
• flexible ISA replacement subscriptions
• defaulted cash account subscriptions
• defaulted investment subscriptions
• Help to Buy ISA reinstatement subscriptions

For a Lifetime ISA, an existing account does not need to be closed but no further payments can be made — other than:

• a defaulted Lifetime ISA subscription
• a returned Lifetime ISA withdrawal after the failure of a first time residential purchase

Find out more about: 

• rules on ISA subscriptions
• managing additional permitted subscriptions
• Lifetime ISA withdrawal after the failure of a first time residential purchase

Bankruptcy of an investor

Under the Insolvency Act, a bankrupt’s estate vests in a trustee immediately on their appointment taking effect. In the case of the Official Receiver, this is on them becoming a trustee.

If you’re notified of the bankruptcy of an investor, you must close the ISA with effect from either the date:

• on which the trustee’s appointment takes effect
• when the Official Receiver became a trustee

Where the account is a Lifetime ISA, you must deduct the 25% withdrawal charge and pay it to HMRC when you close the account. This does not apply in the following cases:

• where the investor is aged 60 or over
• you’ve received the appropriate terminal illness evidence in relation to the investor

Closing dormant accounts

An ISA may be a relevant dormant account if for 15 years or more there have been no transactions:

• carried out by the account holder
• carried out on instructions from the account holder

You can close the account and transfer the balance of a dormant ISA to Reclaim Fund Ltd. Find out more on the Reclaim Fund Ltd website.

Lifetime ISAs are excluded if the transfer would result in a withdrawal charge.

Junior ISAs cannot be relevant dormant accounts and you cannot close them.

Account holders or personal representatives of a deceased account holder who contact you about their closed ISA, have a right to repayment of the balance from Reclaim Fund Ltd.

The repayment of the balance from Reclaim Fund Ltd is not liable to tax.

Recovered funds from the dormant assets scheme can be placed into any type of ISA without counting towards the annual subscription limit except if they’re put into a Lifetime ISA.

Death of an investor

The savings of a deceased investor can continue to benefit from the tax advantages of an ISA, for the period beginning on the death of the account investor and ending on the earlier of:

• the completion of the administration of the deceased’s estate
• the day falling on the third anniversary of the death
• the closure of the account

Any interest, dividends or gains for investments in a continuing account of a deceased investor that arise (which in general terms means ‘paid’) after the date of death to the date of closure of the ISA are exempt from tax.

The ISA is designated as a ‘continuing account of a deceased investor’. Any subscriptions paid into any ISA account after the date of death of an investor should be removed along with any interest accrued on these subscriptions.

Find out how to manage additional permitted subscriptions into an ISA.

Interest on ISA investments

Interest for ISA investments paid or credited after the date of death is within the ISA wrapper and is exempt from Income Tax. For example, an interest distribution from an Authorised Investment Fund, or an interest payment from a corporate bond.

If you receive any income that’s net of tax, you should claim repayment of any tax deducted in the usual way from HMRC. You and the personal representatives of the deceased investor’s estate do not need to take any further action.

Rights conferred by insurance policies

Rights conferred by an insurance policy held in an ISA vest in the personal representatives on the death of the investor. The ISA policy must pay out on the death of the investor and personal representatives must not delay in claiming.

Where a delay in payment of a claim under a life insurance policy results in interest being paid into a ‘continuing account of a deceased investor’, the insurer should not deduct tax from the interest paid. If the death proceeds are held by the insurer 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.

Repairing an ISA

You may find an ISA is invalid. Examples of invalid ISAs are the:

• investments held in the account are non-qualifying
• investor is not a qualifying individual
• subscription to the account is invalid

Invalid accounts can, in certain circumstances, continue as ISAs after being corrected, this is known as a ‘repair’.

Invalid accounts that cannot be repaired must be voided. The account should be closed with the loss of all tax exemptions.

Following the ending of the Tax Deduction Scheme for Interest (TDSI), there is no requirement for banks, building societies and deposit-takers to deduct Income Tax from interest paid or credited when cash ISA subscriptions have been repaired or voided.

Where tax has been deducted and reclaimed from HMRC on interest payments for a stocks and shares ISA, you must repay the tax to HMRC.

In all cases investors must be made aware that there may be more tax to paypay, and that that:

• income removed from the ISA will count towards the investor’s personal savings allowance.
  allowance or personal dividend allowance
• Capital Gains Tax will be applicable on any gains made on the disposal of assets

Two types of invalid account can be repaired:

• where the ISA is invalid because of an inadvertent failure in the checks that should be carried out by you (manager error), you can sometimes repair the account
• where an ISA is invalid because the investor (investor error) has exceeded the overall subscription limit

The invalid subscriptions to the ISA can sometimes be repaired in full or in part. Check the ISA repair ‘Investor error’ and ‘ISA part repair’ sections of this guide.

ISA repair ‘Investor error’

Current year

If you find out from the investor that they have exceeded the overall ISA subscription limit in the current year, you can advise the investor the excess and any related gains will be removed to correct the error. The investor should provide you with instructions on which subscriptions should be removed.

The valid current year investments in a repaired ISA account may keep their tax exemption.

Previous year

If the oversubscription occurred in previous years, you should tell the investor that HMRC will contact them in due course. You should not give any advice to customers, as you may not have all the relevant facts or be certain of the action that HMRC will take. 

The valid previous year investments in a repaired ISA account may keep their tax exemption.

For all Lifetime ISA repairs, the manager must contact HMRC. 

If HMRC find the oversubscription without being notified, then we will inform you and the investor of the error and what action to take.

If the investor wishes to contact HMRC to discuss an error, they can contact the Income Tax general enquiries helpline.

An ISA is not eligible for repair if it’s invalid because:

• the investor did not satisfy the residence qualification at the time they made the subscriptions
• the investor was under age at the time they made the subscriptions — check who can subscribe to an ISA

If you find out that the investor has subscribed to an ISA while not satisfying the residence condition, or when under age, you must void the invalid subscriptions.

ISA repair ‘Investor error’ ISA self transfer

ISA investors must transfer their ISAs through you. Investors cannot transfer an ISA by closing it and opening a new ISA with the new ISA manager (commonly known as ‘self-transfer’). They cannot do this even if they are moving from one ISA product to another with the same manager.

Self-transfer is not available for Lifetime ISAs.

ISA repair — overall subscription limit exceeded

An investor exceeds the overall subscription limit means an otherwise valid ISA will then become invalid during the tax year but it can be repaired.

All tax relief (Income Tax and Capital Gains Tax) onfor thecurrent oversubscriptionand previous year oversubscriptions will be lost up to the date of the HMRC ‘repair’ letter.

Following repair, when the excess subscription is removed from the ISA, the balance of the account will remain exempt from tax. All income earned on the oversubscription before the date of the notice of repair is subject to tax but only the income on the excess subscription has to be removed from the ISA.

Where a Lifetime ISA has also been subscribed to, the excess must be removed from the accounts which are not Lifetime ISAs in date order. This applies even where the Lifetime ISA was first subscribed to later in that year than any of the other ISAs.

ISA repair — removal of excess subscriptions

There are circumstances in which excess subscriptions must be removed from an ISA, such as where:

• the investor subscribes more than the overall subscription limit in total
• the investor:
  • does not exceed the overall subscription limit
  • does exceed the Lifetime ISA payment limit

In the case of exceeding the Lifetime ISA payment limit, the Lifetime ISA must be repaired and excess subscriptions must be removed from it. The excess subscriptions were not valid subscriptions. This means they may be removed without the application of a withdrawal charge. Any government bonus that has been paid must be returned to HMRC.

ISA repair — action by the manager

Current year repair

Where you identify invalid subscriptions due to exceeding the overall ISA subscription limit in the current year, you can advise the investor the excess and any related gains will be removed to correct the error. You should follow the investors instructions on which subscriptions to remove.

Previous year repair

If the oversubscription occurred in previous years, then HMRC may write to the investor before instructing you of the action to be taken. The investor will have been given the opportunity to query the information provided to HMRC. If there are ISAs to be repaired, HMRC will issue a notice of discovery to you and inform the investor of the action to be taken by you.

You should not repair an investor error without a notice of discovery. The date of the notice is the date of repair of the invalid ISA.

For previous years, all invalid investments in a repairable ISA account lose their tax exemption from the date of the first invalid subscription up to the date of repair (this could include all invalid current year investments).

Subscriptions to a repaired ISA for years other than that covered by the notice of discovery are not affected by that notice.

The following paragraphs provide more details, but in summary, where an ISA is repaired or voided, you should proceed as follows:

• interest earned on cash should be taxed in accordance with repair and voiding

• where you have received net income and have claimed tax back from HMRC (for example REIT payments in Property income distributions), you must repay the tax to HMRC and pay income net to the investor

• where you received gross income, you should pay the income out gross to the investor

• the government bonus must be deducted for Lifetime ISAs from the balance in the account — where the balance is not enough to recover the government bonus in full, HMRC may use an assessment against the investor to recover any outstanding amount

In all cases you must tell investors that there may be more tax to pay. You must also tell them that income removed from the ISA will count towards their personal savings allowance.

ISA part repair

This is where income (arising prior to date of repair) is to be taxed and some of the invalid subscription and the associated (taxed) income has to be removed from the ISA.

1. For cash ISAs any interest earned by the invalid subscription is taxed. For stocks and shares ISAs follow the advice for: 

• interest arising on cash: read section ‘repair — action by the manager’
• other interest: read section ‘Interest on ISA investments’

2. Remove from the ISA the element of the invalid subscription that the partial repair notice says must be removed.

3. Remove from the ISA the portion of income that relates to the element of the invalid subscription that must be removed.

From the date of repair the excess subscriptions are not held in an ISA. The balance after removal of the excess is treated as having been held in the ISA from the date of repair.

Within 30 days of the date of the notice you should identify the investments bought with the excess subscriptions and remove them from the ISA. You should also remove any income arising on those investments. If the investments include insurance, the investor should decide which investments to remove. Read section voiding an ISA.

You should follow the guidance on Interest on ISA Investments where a stocks and shares ISA is credited with any of the following:

• interest
• interest distribution
• property income distribution

Where the payment:

• was received under deduction of tax, you have claimed the tax, and have received payment from HMRC — you must repay the tax to HMRC
• is received gross, you only need to tell the investor that they must account for any tax that may be due

ISA repair — identification of investments

Often identification of the investments acquired with invalid subscriptions will be simple. The investor will have made one subscription to the account and bought one type of investment.

Sometimes identification of the investments acquired with invalid subscriptions will be more difficult. You or the investor can select the investments that represent the invalid subscriptions. You can do this using one of the following methods.

The simplest method to identify the investments is to take a fraction of the investments held in the ISA at the date of repair to represent the invalid subscriptions.

Another method is to follow the subscriptions through the account and identify the relevant investments.

Identification of investments removed from a repaired ISA applies only for ISA purposes. The investor must apply normal Capital Gains identification rules to disposals of investments for both:

• disposals made before repair
• disposals made as part of the repair

If any of the excess subscription to be removed from the ISA is assigned to an insurance product, then it is possible to repair the subscription if the terms and conditions of the account allow it. Read about policies of life insurance.

Voiding an ISA

Where an ISA cannot be repaired it must be voided. This is where an invalid subscription and all income earned on the invalid subscription has to be removed from the ISA. Valid subscriptions made in both earlier and later tax years are not affected.

Since 6 April 2016 tax has not been deducted by ISA managers from interest earned on invalid ISA subscriptions. The interest earned counts towards an investor’s Personal Savings Allowance.

All of an invalid subscription is removed from the ISA. However, if an investor has a Lifetime ISA excess subscriptions can be removed from the ISAs which are not Lifetime ISAs in date order. This means that the investor can keep their Lifetime ISA and will not incur the withdrawal charge that would be charged if excess subscriptions are removed from a Lifetime ISA.

Where a stocks and shares ISA or Innovative Finance ISA is made void it does not mean that the investments must be sold. If the ISAs terms and conditions allow, you can transfer the investments to the investor. An exception is a void ISA policy of life insurance which must be terminated and cannot be transferred to the investor.

An ISA opened with a continuous application the tax year in which the breach occurred must be voided. This means that all subscriptions in that tax year and any gains must be removed. Subscriptions made in earlier and later years are unaffected unless the breach occurred in other years.

ISA repair and voiding — transfers and withdrawals

Where an account is voided or repaired you need to recover any Income Tax claimed on investments bought with the invalid subscriptions.

You must write to HMRC if, after using any cash balance and the sales proceeds from investments, there are insufficient funds in the account.

This could happen, for example, if:

• the investor has withdrawn funds
• the account has been closed
• the account has been transferred to another manager

When you write to HMRC, you must provide details of the amount of tax credit or tax on interest that has not been recovered.

Withdrawals from an ISA prior to the date of the notice of discovery can be counted towards the amount of invalid subscriptions that must be withdrawn to repair the ISA. You can only do this if the withdrawal does not pre-date the date of the invalid subscription.

However, in the case of flexible ISAs, any replacement subscriptions must also be taken into account. Other than this, the investor or manager can select the investments that are to be withdrawn.

ISA repair and voiding — accounting for tax

Any tax claimed from HMRC repayments on income arising on the invalid subscriptions, must be repaid by the provider. This is normally done by deduction from the next claim under the heading ‘Adjustments to previous claims’.

In all cases you must tell investors that there may be more tax to pay. You must also tell them that income removed from the ISA will count towards their personal savings allowance.

ISA repair and voiding — information to be provided to investor

You should inform investors of the following.

Where investments were bought with the invalid subscription or investments were transferred to the ISA:

• the date and amount of each income payment received for those investments
• the amount of tax deducted from those income payments
• the original cost price of the investments
• any incidental costs of acquisition
• the date of acquisition

If the investments have been disposed of:

• the date of disposal
• the amount of the sale proceeds
• any incidental costs of the disposal

If the investments have since been sold, you should also provide the same details for the replacement investments.

Where interest was paid or credited on cash deposits for that invalid subscription:

• the date and amount of interest paid or credited
• the amount of any tax deducted from that interest
• that the interest paid will count towards their personal savings allowance

If the ISA contains an insurance product, you will need to find out the amounts of any gains treated as arising so that you can calculate how much tax to deduct.

You must inform the investor of the:

• amount of premiums paid and the date on which they were paid
• amount of part withdrawals and the date on which each was made
• for each part withdrawal, the date of the last day of the ‘year’ as defined in section 546(4) ICTA 1988 in which the part withdrawal was made
• amount of tax deducted for each part withdrawal
• benefits payable on death, maturity or surrender and the date of the event
• amount of tax deducted for the benefits payable on death, maturity or surrender
• amount of benefits actually paid to the investor, after all deductions of tax

You should tell the investor to report details arising for the void subscriptions for the tax year in which they arose to their tax office. They should report the following details:

• interest
• dividends
• chargeable gains
• allowable losses and corresponding deficiencies

Find more information about chargeable events in the ‘Check if a life insurance policy can be included in an investor’s ISA’ guide.

Where requested by the investor, you should give them:

• tax certificates R189K
• Section 975 certificates
• their own tax vouchers

These certificates or vouchers should show:

• the dividends
• tax credits
• gross interest credited
• any tax deducted