How does cash ISA & share ISA mix together

Question

I am trying to understand the ISA concept in the UK. I think I understand cash and share ISA separately but I do not know how they mix together.

Right now I have on a cash ISA 15K£+15K£ (Y-1+Y0). Here are a few basic questions:

1. Is ALL the profit (if any) tax free (even I was to do 100% profit) ?
2. Say I make 1% (300£) at the end of the tax year on the 30K, is the profit generated by last year allowance (150£) also tax free ?
3. If I decide to reinvest the profit would this also generate tax free profit ?
4. Say I decide to take the 20K£ out of the 30K£ to buy stocks, how does this work in practice (I mean how does HMRC knows it is from an ISA account) ?
5. Say I make 1% (300£) at the end of the tax year, can I take them to buy groceries or is there some kind of locking rule (I know that once they are out they are out of the ISA pool for next year) ?
6. Can I trade as much as I want, like "buy shares, sell them" then put the proceed on cash ISA, then buy shares again when I feel like it ?

Answer 1

There are two different types of ISA; the "Cash ISA" for cash savings, and the "Stocks and Shares ISA" for stock market investing. You can transfer funds between these two different types of ISA. If your current cash ISA provider does not provide stocks and shares ISAs, then there may be a fee involved when transferring funds between two different providers.

If I am reading your notation correctly, you have contributed the full allowance of GBP15,240 in both the current tax year and the previous tax year.

Each year you can contribute GBP15,240 (currently) to your ISAs and this can be done in any combination of cash ISA and stocks and shares ISA. For example, you could put GBP5,240 into your cash ISA and GBP10,000 into your stocks and shares ISA.

Regarding your questions :

1. Yes, all profits are tax free regardless of the amount.
2. Yes, it is tax free and does not effect next years contribution amount. You are still entitled to contribute GBP15,240 regardless of profits (or losses) on previous contributions.
3. Yes, you are free to reinvest capital and profits within your ISA accounts and all of the resulting profits will be tax free.
4. It is important to transfer the funds from your cash ISA into your (new) stocks and shares ISA. Do not withdraw the funds in the sense of removing the funds from the tax shelter. HMRC requires that ISA providers play by the rules, so they rely on the providers doing so. If you attempt to play outside of the rules then your provider should stop you from doing so.
5. Once you withdraw money from an ISA you can spend it as you wish. However, you cannot redeposit that money in your ISA, other than as new contributions in the following tax year and subject to the contribution limits.
6. Yes. You can trade as much as you wish within a stocks and shares ISA, and transfer funds between the two types of ISA. This will be greatly simplified if your ISAs are held with the same provider. You can also transfer your cash ISA from one provider to another, so if your current cash ISA does not provide stocks and shares ISA, you can transfer your cash ISA to a provider that does provide both. (There may be a fee to pay - speak to your current provider.)

It is also important to understand that once you withdraw money from an ISA, it does not affect your previous contributions or allowances. For example, if you have used your full contribution allowance for the current year and chose to withdraw some funds, then you have still used your full contribution allowance and so you cannot redeposit these funds.