Repairing or voiding an ISA – A guide

What is an ISA repair?

An ISA repair is the process of correcting an invalid ISA so that it can continue to qualify for tax advantages. An ISA may become invalid if: 

• Subscriptions exceeding the annual limit.
• Subscriptions are made by ineligible individuals.
• Improper transfers between ISA managers.
• Holding non-qualifying investments.

Repairs are only possible under certain conditions. If the error cannot be corrected, the ISA must be voided, resulting in the loss of tax advantages. 

Check out HMRC’s examples of repaired and voided ISAs. 

When is it possible to repair an ISA? 

Repairs are allowed when: 

• The over-subscription is due to investor mistake, not fraud.
• The investor meets residency and age requirements.
• The ISA manager identifies and corrects the issue. 

Repairs are not allowed if:

• The investor was underage or non-resident at the time of subscription.
• The ISA holds non-qualifying investments.

Where this has happened, the ISA must be voided, and the subscriptions must be returned. 

Over-subscriptions and how to repair them

Over-subscriptions

An over-subscription occurs when an investor contributes more than the permitted amount to one or more ISAs in a tax year. This can happen due to: 

• Misunderstanding the annual limit.
• Making Lifetime ISA subscriptions without adjusting other ISA subscriptions. 

Repairing over-subscriptions 

HMRC allows repairs for over-subscriptions if: 

• The excess is identified and removed.
• The remaining subscriptions are valid.
• The error was made by the investor (not due to fraud or ineligibility). 

Lifetime ISA over-subscriptions 

Lifetime ISAs have a stricter £4,000 annual limit. If this is exceeded: 

• The excess must be removed.
• The government bonus is not paid on the excess. 

Any government bonus will be returned to HMRC.  The 25% withdrawal charge will not be applied to the refunded subscription.  

ISA transfers: why self‑transfers cause problems

A self-transfer occurs when an investor closes one ISA and opens another with a different provider, transferring the funds themselves rather than using the official ISA transfer process. 

ISA investors must notify the ISA manager if they want to transfer their ISA.  

If an investor transfers an ISA by closing it and opening a new ISA, the funds taken from the old ISA will be treated as a new subscription under the new ISA. Investors cannot do this even if they are moving from one ISA product to another with the same manager.

If a self-transfer occurs, this is not something that can be repaired. 

How is an ISA repaired? 

The process involves:  

• Identifying the error: either by the ISA manager or HMRC.
• Removing invalid subscriptions: including any gains or interest.
• Notifying the investor: explaining the implications.
• Reporting to HMRC: especially for Lifetime ISAs. 

ISA managers must ensure that: 

• Removed income is taxed appropriately.
• Capital gains outside the ISA are reported.
• Investors are informed of their tax obligations. 

Are there special rules relating to Lifetime ISAs? 

Different rules and conditions apply to Lifetime ISA: 

• Only available to individuals aged 18–39.
• Government bonus of 25% on contributions.
• Funds can be used for first-time home purchase or retirement. 

For all lifetime ISA repairs the ISA manager must contact HMRC for instruction. 

This is so there is no loss of government bonus, application of withdrawal charges, or the ISA being voided.

Are there tax charges if an ISA is repaired or voided?  

When an ISA is repaired, the valid part of the ISA continues to benefit from tax exemptions. However, any invalid subscriptions or associated income that are removed from the ISA may become taxable. 

No matter what type of ISA, the individual must be told that there may be more tax to pay. They must also be told: 

If the ISA is repaired 

• Income Tax 

Interest or dividends earned on the invalid portion of the ISA will count towards the investor’s Personal Savings Allowance or Dividend Allowance. 

If the allowance is exceeded, the investor may be liable for Income Tax on the excess. 

• Capital Gains Tax (CGT) 

If assets (for example, shares) acquired through invalid subscriptions are removed from the ISA and later sold, any gains may be subject to CGT, as they are no longer sheltered within the ISA wrapper. 

In all cases and ISA manager must inform investors that they may have additional tax to pay. 

If the ISA is voided 

If an ISA is voided, that is it is entirely invalid and it is closed, the entire account loses its tax-free status. This means: 

• All income generated by the ISA becomes taxable.
• Interest, dividends, and other income earned in the voided ISA will be treated as ordinary taxable income.
• These amounts must be included in the investor’s tax return and may be subject to Income Tax or Dividend Tax. 

• Capital Gains Tax 

Any gains made on investments held in the voided ISA are no longer exempt from CGT.  If the investor sells these assets, they must calculate and report any gains. 

Lifetime ISA Withdrawal Charge 

When a Lifetime ISA (LISA) is voided, the 25% withdrawal charge does not automatically apply in the same way it does for standard unauthorised withdrawals.  

When this type of ISA is voided it is not treated as a valid Lifetime ISA, because if this the 25% withdrawal charge does not apply. However, any government bonus that was given must be repaid to HMRC.  The remaining funds are treated as ordinary savings and the normal tax rules apply.  This means any interest or dividends earned on the funds will count towards the investor’s Personal Savings Allowance or Dividend Allowance. Any gains on assets held may be subject to CGT.