Need some help understanding the 'wrapper' for ISAs and how it works with accumulating VS income

the_invisible_man

Hi Guys,

I'm just reaching out as I have recently opened an ISA account and broadly understand that if you put £1,666.66 or less in a month, you don't pay any tax within the ISA.

What has confused me and that I think I just need a bit of help/clarity is the below:



In the scenario everything stays within my ISA, nothing is drawn into a current account etc. am I paying any tax on any of the above?

What is confusing is if I am investing a total of £18,000.00 of my own cash from my UK bank accounts over the space of 14 years but my actual 2037 starting fund is £40,075.31 due to either dividends or accumulation how is this treated inside the ISA wrapper.

I am particularly interested to see if there is any difference between an accumulating ETF model (where it is re-invested automatically) and an income ETF model where the dividends are released periodically back to the ISA account (where I would re-invest them manually into the ETF or other shares and stocks.

And then finally if I decided to call it quits and draw the £43,809.61 from the ISA and close it, would I pay tax on £23,809.61, unless I drew it over 2 years, or does the fact that the accumulation of income has come from profits make it non-taxable?

Thanking you all lots in advance.

eskbanker

There is no tax payable on growth or income that stays within the ISA, and so there is no difference between income or accumulation unit treatment.

When you withdraw anything from an ISA, there is still no tax paid on that money on withdrawal, but if you subsequently earn interest on it then that income would be subject to tax in the normal way.

the_invisible_man

Thanks for replying Eskbanker.

So if I drew it out in 2037 but it under my bed so it gained no interest, then decided to put 20k back into an ISA one year to do it all again I wouldn’t have any tax to be paid, is that right? 

Albermarle

the_invisible_man said:

Thanks for replying Eskbanker.

So if I drew it out in 2037 but it under my bed so it gained no interest, then decided to put 20k back into an ISA one year to do it all again I wouldn’t have any tax to be paid, is that right? 

Yes assuming the ISA rules have not changed by then.

As you mention dividends and accumulation finds etc I presume this must be a S& S ISA. In that case best not to refer to also to refer to 'interest' which normally you only get from savings/cash ISA, as it is confusing.

and broadly understand that if you put £1,666.66 or less in a month, you don't pay any tax within the ISA.
You never pay tax within the ISA. If you accidentally add more than £20K in a tax year, then at some point it will most likely have to be refunded back to you at some point.

eskbanker

the_invisible_man said:

Thanks for replying Eskbanker.

So if I drew it out in 2037 but it under my bed so it gained no interest, then decided to put 20k back into an ISA one year to do it all again I wouldn’t have any tax to be paid, is that right? 

That's right, but if you were to do something so bizarre then tax would be the least of your issues!

the_invisible_man

@eskbanker ha! 

This is exactly what I needed to know, one final question around ETFs that are worldwide and not UK, just want to make sure that there isn’t any weird tax implications from overseas investments that ISAs can become victims of, or I can after drawing it out.

thanks so much you’ve been a massive help!

eskbanker

the_invisible_man said:

one final question around ETFs that are worldwide and not UK, just want to make sure that there isn’t any weird tax implications from overseas investments that ISAs can become victims of, or I can after drawing it out.

Within ISAs it's easy - as above, no tax.

If you were to hold ETFs unwrapped then it can get more complex, so you'd need to familiarise yourself with the variations in treatment, see the likes of https://www.justetf.com/uk/news/passive-investing/how-etfs-are-taxed-in-the-uk.html

dunstonh

This is exactly what I needed to know, one final question around ETFs that are worldwide and not UK, just want to make sure that there isn’t any weird tax implications from overseas investments that ISAs can become victims of, or I can after drawing it out.

Why ETF and not OEIC?
Nowadays there is little difference and some OEICs are better than the comparable ETF.

the_invisible_man

dunstonh said:

This is exactly what I needed to know, one final question around ETFs that are worldwide and not UK, just want to make sure that there isn’t any weird tax implications from overseas investments that ISAs can become victims of, or I can after drawing it out.

Why ETF and not OEIC?
Nowadays there is little difference and some OEICs are better than the comparable ETF.

With regards to why ETF, I was looking across both ETFs and stuff like Fundsmith, some of the long term yield on stuff like HMWO, properly looking to get both in the long term a blend of ETF and one or 2 OEIC. But for the moment unless I’m missing something some of the global funds look more attractive