A cash ISA transfer involves moving a specific type of United Kingdom investment from one provider to another. The cash ISA is a form of Individual Savings Account that carries a favorable tax status. The rules behind this tax break mean that a cash ISA transfer must be carried out in a particular way.
The Individual Savings Account was introduced in the United Kingdom in 1999. It replaced two similar schemes, the Personal Equity Plan (PEP) and the Tax-Exempt Special Savings Account. The ISA allows UK residents aged at least 16 to invest cash in a way that reduces or eliminates tax liabilities.
There are two types of ISA. The cash ISA is simply a form of savings account, offering a guaranteed return. The stocks and shares ISA involves the money being invested in financial markets and thus offering a variable return. As of the 2010/11 financial year, a person can put up to £5,430 UK Pounds Sterling into a cash ISA, a figure that was scheduled to increase in line with inflation each year. No tax is payable on the interest earned on a cash ISA.
Once a person has money in a cash ISA, he is able to move it to another provider, such as one that offers a higher interest rate. The process of doing this is relatively simple in theory, though potentially complicated in practice. The first consideration is whether the existing cash ISA contains a penalty clause for taking the money out before an agreed date. If this is the case, the investor needs to calculate if this penalty will exceed the financial benefit of changing provider.
Somebody carrying out a cash ISA transfer does not have to add any new money. In this situation, the person simply opens the new account, mentions on the application form that he wishes to transfer money from an existing ISA, and gives the details. The old provider then has 30 days to complete the transfer. It is also possible to add new money to the new ISA, or to transfer money from two or more old ISAs.
Whatever set up the person chooses for the cash ISA transfer, he must still follow the annual limits set by tax regulations, covering the amount of money that can be paid into ISAs. This only covers new money put into ISAs by the taxpayer during a financial year, and does not cover the transfer of money already into an account. Because of this, it is possible after several years to have large amounts of money in a single cash ISA.