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I would like to open an ISA account to invest in funds and I see that the maximum allowance is increasing to 15,000 GBP in few months.

My understanding is that all incomes generated in the ISA are tax free. But does this also apply to potential gains that are realized within the tax year?

In other words, it is not clear if (in order to benefit from tax benefits) I need to hold my investments until the end of the tax year.

Just to make an example. Suppose that tomorrow I invest 10,000£ in a fund and this increase in value to 12,000 in 5 months time (in october, so before the end of the tax year). In october I decide to realize the profit, thus I sell the fund. My gain is 2,000£. Is it tax free?

If I then reinvest (still 10,000£) in another fund, and I realize another profit by selling it just 1 month later (november) is this other gain still tax free?

Just to summarize, it is not clear if realizing profits by switching between funds actually leads to tax free income or there is some condition to meet in order to qualify for tax free treatment (eg. gains from "trading" the fund by switching from equity to monetary funds are not allowed and thus they are taxed). Thank you.

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You're overthinking it.

The ISA limit applies to the amount you invest into the ISA. In your example, £10,000. Whether that then fluctuates with performance is irrelevant. Even if you realise aprofit or a loss, nobody is watching it.

You merely count the amount you originally contributed into the ISA wrapper. When they add up to £15,000; that's the limit reached.

(And by the way, remember that only money going into the ISA is counted. It doesn't matter if you -let's say - put £15k in, then remove 10k. You've reached the limit. You don't again have the chance to put £10k 'back in'.

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    All of your analysis of Fund A to B, etc is unnecessary. You put £10,000 in. That's the amount that is counted towards your limit. You are free to add another £5,000. It doesn't matter whether that original £10k has gone up or down in value - it was £10,000 at time of contribution. Count the value of the contributions that you put into the ISA. The performance afterwards is free of taxes. But the value of the contributions as they go in are the only amounts you need to pay attention to when thinking of the limit. As I said, you're merely over-thinking it. – Chris May 13 '14 at 18:42
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    Let's break this down into more simple terms. You put £10,000 in. Regardless of how the fund then performs, you are still able to put £5,000 more in. That's because only the original contribution is counted. The gains/losses once invested aren't counted towards the limit. Is that clearer? – Chris May 13 '14 at 18:50
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    You're thinking one level too deep. Let me see if I can put your example into a real world scenario. "John opens a Hargreaves Lansdown account, specifically their stock & shares ISA. He deposits £10,000. Using the £10,000 he invests in FundA and within 2 months, the value is up to £14,000. John then sells FundA. The £14,000 sits in his Hargreaves Lansdown account for a few weeks until John invests in FundB. After a month, FundB has fallen and the value of the investment is now £12,000." So - £10,000 went in to the ISA. That's the only figure that counts towards the limit. £5,000 still left. – Chris May 13 '14 at 19:01
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    I must say this though: wherever money is involved, if you don't understand it then DON'T do it. You are struggling with the logic of ISA limit calculation. That won't be anywhere near as complicated as picking funds (or heaven forbid, individual stocks) to go into the ISA. It is always worth seeking financial advice or even consulting Money Advice Service or Citizens Advice for more guidance. If you lost this £15,000 that you could potentially invest here, it's an expensive mistake when a few pounds to an adviser might have avoided such a mistake. Just my tuppence worth... – Chris May 13 '14 at 19:26
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    Income Tax details: hmrc.gov.uk/rates/it.htm#1a Capital Gains Tax details: hmrc.gov.uk/rates/cgt.htm#1 – Chris May 13 '14 at 20:57
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An ISA is a much simpler thing than I suspect you think it is.

It is a wrapper or envelope, and the point of it is that HMRC does not care what happens inside the envelope, or even about extractions of funds from the envelope; they only care about insertions of funds into the envelope. It is these insertions that are limited to £15k in a tax year; what happens to the funds once they're inside the envelope is your own business.


Some diagrams:

Initial investment of £10k. This is an insertion into the envelope and so counts against your £15k/tax year limit.

+---------ISA-------+ ----- £10k ---------> | +-------------------+

So now you have this:

+---------ISA-------+ | £10k of cash | +-------------------+

Buy fund:

+---------ISA-------+ | £10k of ABC | +-------------------+

Fund appreciates. This happens inside the envelope; HMRC don't care:

+---------ISA-------+ | £12k of ABC | +-------------------+

Sell fund. This happens inside the envelope; HMRC don't care:

+---------ISA-------+ | £12k of cash | +-------------------+

Buy another fund. This happens inside the envelope; HMRC don't care:

+---------ISA-----------------+ | £10k of JKL & £2k of cash | +-----------------------------+

Fund appreciates. This happens inside the envelope; HMRC don't care:

+---------ISA-----------------+ | £11k of JKL & £2k of cash | +-----------------------------+

Sell fund. This happens inside the envelope; HMRC don't care:

+---------ISA-------+ | £13k of cash | +-------------------+

Withdraw funds. This is an extraction from the envelope; HMRC don't care.

+---------ISA-------+ <---- £13k --------- | +-------------------+

No capital gains liability, you don't even have to put this on your tax return (if applicable) - your £10k became £13k inside an ISA envelope, so HMRC don't care.

Note however that for the rest of that tax year, the most you can insert into an ISA would now be £5k:

+---------ISA-------+ ----- £5k ---------> | +-------------------+

even though the ISA is empty. This is because the limit is to the total inserted during the year.

  • Hi, this is a very clear explanation and I thank you for that. I just suspect that I cannot meet all the requirements in order to qualify for a ISA account. Almost all the broker say that you must be UK resident. Well, I'm technically a French resident but I live and work (so I pay taxes) in UK. I obviously have a National Insurance Number (NIN). In the application form, it seems that the NIN is all you need. But does it matter that I am still a French resident even if I actually live and I am employed and pay taxes in UK? – opt May 14 '14 at 9:29
  • I would suspect yes, based on Can I have an ISA? and Residence on HMRC's website, but I'd suggest giving them a call (they're actually pretty good on the phone, once you actually get through...) – AakashM May 14 '14 at 10:00
  • Thanks for the useful links. As I am a full-time employee in UK, thus spending more than 183 days here, I should be considered as UK resident for tax purposes. – opt May 14 '14 at 13:20

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