ISA with no money in it - is it ok to close?

littlelocket

I have a cash ISA, but transferred most of the money out of it in July (because I needed to spend it, not to try to get a better rate) so there's only £3.50 in my ISA. I'm getting a rubbish rate and am now in a position to start saving again so want to close my existing ISA and open another one with a better rate. The best rates are for ISAs opened with new money, not funds transferred in. It's not worth transferring £3.50, and clearly I'm not getting any interest on that so is it ok to close my existing ISA and just open another one?

All the existing advice I've seen on various websites says you mustn't close it as you'll lose your tax free allowance, but obviously that assumes you have money in it!

Any advice would be very welcome. Thanks

Paul_Herring

One thing you've omitted: Have you placed any money into a cash ISA since the 5th April this year? (But in general, the answer to your question is just close it and open another.)

xrjtg

The "lose your allowance" comment relates to the fact that you can only pay into one cash ISA a year: if you pay 50p into an account on 7 April and close it the next day then you can't open another account anywhere else, so you've "lost your allowance". There's some not-too-clear policy on "self-transfers" that's probably relevant.

Paul_Herring

xrjtg wrote: »

The "lose your allowance" comment relates to the fact that you can only pay into one cash ISA a year: if you pay 50p into an account on 7 April and close it the next day then you can't open another account anywhere else, so you've "lost your allowance".

Citation please?

blueberrypie

xrjtg wrote: »

The "lose your allowance" comment relates to the fact that you can only pay into one cash ISA a year: if you pay 50p into an account on 7 April and close it the next day then you can't open another account anywhere else, so you've "lost your allowance". There's some not-too-clear policy on "self-transfers" that's probably relevant.

You can do a self-transfer as long as you follow certain rules, and you only do it once in a tax year. See http://www.hmrc.gov.uk/isa/isa-guidance-notes-2008.pdf

...where
• the investor subscribes to two cash ISAs, in the same tax year, and
• subscriptions to the first ISA subscribed to were valid, and
• the first ISA subscribed to was closed (see paragraph 12.33) before
subscriptions to the second ISA were made
the subscriptions to the second ISA may be valid (see paragraph 12.32a).
12.32a The first cash ISA to be self-transferred in tax year is valid, and need not be
repaired.
The second (and any subsequent) self-transferred cash ISA is not valid and is not
eligible for repair.

xrjtg

Paul_Herring wrote: »

Citation please?

3.14 on page 23 of the document linked to by blueberrypie.

HMRC wrote:

In each tax year, ISA investors may subscribe to
• one cash ISA and
• one stocks and shares ISA
They may not subscribe to two (or more) cash ISAs, or two (or more) stocks and
shares ISAs in the same tax year.

The section dealing with self-transfer begins at 12.30 on page 119, and was partially quoted by blueberrypie. "Self-transfer" is listed under "Voiding and repair - Investor error", so this is a practice that's tolerated rather than encouraged. Along similar lines, other posters (sorry, no citation!) have mentioned that fully funding two accounts in one year will only get you a slap on the wrist the for the first offence, but it would be unhelpful to tell people "you can only subscribe £5100 a year to one cash ISA, except for one year when you can accidentally forget and open 2 with no consequences".

psychic_teabag

littlelocket wrote: »

am now in a position to start saving again so want to close my existing ISA and open another one with a better rate.

Perhaps not a very money-saving answer, but do you expect to save more than £5000 before April 2012 ? If not, you could keep life simple and just use a simple taxable instant-access account for now, and then open a new ISA in 5 weeks time, at the start of next tax year, making a fresh start. Even if you had a full £5000 ready to save now, one month's interest at 3% is only £12.50, and so basic-rate tax would only be £2.50.

But if you expect to save more than £5000 by April 2012, then obviously it makes sense to try to get some of that in this year's ISA allowance.

Lokolo

xrjtg wrote: »

The "lose your allowance" comment relates to the fact that you can only pay into one cash ISA a year: if you pay 50p into an account on 7 April and close it the next day then you can't open another account anywhere else, so you've "lost your allowance". There's some not-too-clear policy on "self-transfers" that's probably relevant.

This isn't always correct as a lot of ISAs have a cooling off period. If you close withing the cooling off period it will not count as a subscription.

But otherwise, you are right

Q. What happens if I change my mind?

A. Some ISA managers will offer ISA products that give you a 'cooling off' or cancellation period (usually 7 or 14 days), in which you can change your mind about buying. (If they do, this will be specified in their ISA terms and conditions.)
If you change your mind and cancel the ISA within the period set out by the ISA manager, the payment made will not count as a subscription into an ISA in that tax year and you will be free to put money into an alternative ISA in the that tax year (with the same or a different manager).

If you change your mind after the end of that period (or the manager does not offer a cancellation or cooling off period), you cannot 'unwind' the transaction by closing the ISA. The payment made will still count as a subscription into an ISA and you may not put money into another ISA of the same type in that tax year. However, you could transfer the ISA to another ISA manager - see Transferring your ISA.