What happens tax-wise when you close an ISA?

11 June 2013

Q

Last year, Moneywise said "whether you're saving for a rainy day or for two weeks in the sun, a cash ISA is the ideal place for your money".All money deposited in savings will at some point be taken out for whatever purpose. However, according to NS&I, closing an account means you permanently lose the tax-free benefit on any current and previous years' deposits – so what is the point of having an ISA if you have to pay back the tax-free benefit accrued? Adverts always mention opening ISAs but little is said about what happens when you close them.
From
CJ/Buckley

A

I'm not sure I understand the point you're trying to make. If you draw out money from an ISA to spend, you would surely only draw out the money you need rather than closing the account altogether. You would only be taxed on any interest accruing after the date of withdrawal – but, presumably, if you have drawn it to spend, then it won't be around long enough to gain any interest?

When an individual dies, an ISA loses its tax-free status from the date of death. So it is only interest from that date subject to income tax. All tax affairs have to be settled before probate is granted, but if this is done quickly there's a good possibility no further interest will have been added.

I haven't seen the NS&I article to which you refer, so I can't tell how it is phrased. But it is correct in saying you lose the tax-free benefit on all money deposited over the years – insofar as all future returns will be taxable. However, in both these scenarios you certainly don't 'pay back' the tax benefit accrued.

In fact, I can't envisage any situation in which someone would withdraw money from an ISA and then deposit it where the returns are taxable.

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