How to Close an ISA

Should you close your ISA or transfer it? 

What closing an ISA actually means 

Closing an ISA means the account is formally shut down by your provider, and the money held within the account is removed from the ISA wrapper. This usually involves withdrawing funds to your bank account or moving them into a non-ISA savings account. If you do decide to deposit the withdrawn funds from the closed account into another ISA without using the official transfer process, it will count towards your ISA allowance again. 

When you should close an ISA

There are a few situations where you might want to close an ISA, but the most common one is when the account isn’t being actively used to grow your savings and may only hold a nominal balance.  

In most of the other scenarios where you might be thinking about closing the ISA, it’s likely that an ISA transfer will be a better option. 

For instance, if you’re considering closing an ISA because the interest rate is no longer competitive, transferring the funds to another ISA provider offering a better rate is likely to be a better option, because it will preserve your tax benefits.  

Simplifying your finances might be another reason you’re considering closing one or more ISAs, but if you hold multiple small ISA balances it’s usually better to use the official ISA transfer process to consolidate those ISAs into one while retaining your tax benefits.  

When transferring is better than closing 

In many cases, transferring an ISA is preferable to closing it. A transfer allows you to move your savings to a new provider or different ISA type while preserving the tax-free wrapper on the money within the account. This means you continue to accrue tax-free interest.   Transferring also helps you to maintain your ISA contribution allowance. Money transferred between ISAs does not count as a new contribution, so it does not use your annual ISA allowance. This can be particularly important if you've built up a substantial balance over several years and want to avoid losing the ability to shelter those savings from taxation.  

Savings goals can change, so different ISAs with different interest rates may be worth exploring. In that case, transferring is the optimal next step. Closing should be reserved for situations where you weren’t actively benefiting from the tax-free benefits ISAs are designed to offer.  

Closing vs Transferring an ISA 

What happens when you close an ISA? 

Do you lose tax-free protection? 

Once you close your ISA and withdraw the funds, they are no longer protected by the ISA's tax-free wrapper. Any interest earned on those funds is treated as taxable savings interest.  

If you decide to reallocate the withdrawn funds from the closed ISA account to a different ISA at a later date, it will count as a new contribution and use up part of your annual ISA allowance, rather than restoring the original tax shelter. 

Does your ISA allowance reset? 

Your £20,000 annual ISA allowance resets each tax year, but if you close an ISA any allowance used within that year will be lost. 

Does your provider report the closure to HMRC? 

When you close an ISA, your provider will notify HMRC as part of its routine ISA reporting requirements, helping ensure that records accurately reflect when the account was opened, funded, and closed. You do not need to notify HMRC yourself.  

How to close a Cash ISA 

Step-by-step process 

Closing a Cash ISA is straightforward, and most banks and building societies offer multiple ways to manage your account, enabling you to complete the process quickly when you’re ready. 

Once this process is complete, the provider will close the account and release the funds, usually within a few working days. 

How long it takes 

In most cases, closing a cash ISA is a quick process, with the account sometimes closed on the same day, especially if the request was made online or through a mobile app. However, depending on the provider, account closure may take a bit longer. 

What happens to interest accrued? 

Any interest earned in your cash ISA up to the date the account is closed is paid into your account, tax-free, in line with ISA rules. This includes accrued interest that has not yet been credited to the account at the time your request is made.  

Providers will usually automatically calculate the final interest and include it in the balance paid out when the ISA is closed. Once the money has been withdrawn and the account is shut, any future interest earned on those funds outside the ISA will no longer be tax-free. 

How to close a Stocks and Shares ISA 

Closing a Stocks and Shares ISA involves a few more steps than closing a cash ISA, since investments must be sold before the account can be shut. 

• Sell your investments: To close the ISA, you will need to sell any shares, funds or ETFs held within the account. This can be done through the selected investment platform. 

• Settlement: Once the investments are sold, the trades must settle before the cash becomes available. For most UK-listed shares and funds, settlement occurs T+2, meaning two working days after the trade is executed. Investments listed on other exchanges may have different settlement times.  

• Withdraw cash: After settlement, the proceeds are available as cash within your ISA. You can then withdraw this cash to your bank account or another non-ISA account, depending on your provider's options. 

• Request account closure: Once all assets have been sold and the balance is zero, you can formally request that the Stocks and Shares ISA be closed. Providers usually allow this through their platforms, by phone, or in writing. 

It’s important to check your provider's specific process and any dealing fees before starting, especially if you are closing the account within a tight timeframe. 

Risks and considerations 

Closing a Stocks and Shares ISA comes with a few additional risks and practical considerations to consider before closing the account.  

One of the main risks is market timing. Selling investments means crystallising their value at current prices, which can lock in potential losses if markets are down. 

How long it takes 

Closing a stocks and shares ISA account can take between 3 and 10 days; it is typically longer than closing any other type of ISA due to a variety of factors, such as needing to first sell the investments, which can take a couple of days.  

Once the trades have settled, you can then withdraw the funds, and the account closure process can begin, which varies depending on the provider.  

How to close a Lifetime ISA (LISA) 

The 25% withdrawal penalty 

Closing a LISA is more restrictive than closing other ISAs due to government withdrawal penalties. Unless the funds within the account are being used to buy a first-time property or accessed after the age of 60, closing the account will incur a 25% charge on the amount withdrawn. 

While the penalty is correlated with the government’s aim to reclaim the government bonus, which is 25%, the charge applies to the full balance on the contributions, meaning you can end up with less than you put in. 

Let’s consider an example to understand how this might play out: 

If you contribute £4,000 into a LISA, the government will add a £1,000 bonus, bringing the total balance of the account to £5,000. If you decide to withdraw the funds, the penalty will be applied to the full £5,000.  

A 25% charge equals £1,250, leaving the balance at £3,750, resulting in a loss of £250 from what you originally contributed, before taking into account any interest accrued on the deposited amount. 

When you can close it without penalty 

There are only a few scenarios where you can close a LISA without penalty: 

• If you’re buying your first home 

• If you’re now 60 years old or older 

• If you’ve been diagnosed with a terminal illness. 

When you should not close a LISA 

If you’re under the age of 60, are in good health, and aren’t buying your first home, then it’s likely to be a bad idea to close a LISA because doing so is likely to cost you not only the government’s bonus but also some of the money you’ve contributed yourself.  

How to close a Junior ISA 

Can a parent close a Junior ISA? 

A parent or guardian can open a Junior ISA (JISA), but once contributions have been made to the account, the funds are locked in until the child is 18. Whilst account closures are prohibited for the parent or guardian, funds can be transferred to another provider if they find better investment opportunities or rates.  

The only exception to this is if the child passes away or is terminally ill; in this case, account closure will need to be made with the provider directly. 

What happens at age 18 

When a child turns 18, the account will automatically convert from a JISA to an adult ISA; this is known as the account maturing. The money will remain in that account, but no further contributions will be permitted unless they are transferred to another ISA, such as a cash ISA or Stocks and Shares ISA, or until the accountholder gives the ISA provider the documentation they require as part of a new adult ISA application.  

How to close an Innovative Finance ISA (IFISA) 

What makes closing an IFISA different? 

Closing an Innovative Finance ISA can be a lengthy process because the funds are tied up in illiquid assets like peer-to-peer loans or debt-based investments rather than held in cash or more liquid assets like exchange-listed shares. Funds are often committed for a fixed term, meaning that money may not be instantly available.  

Timescales and restrictions 

If you want to withdraw funds from your IFISA, expect much longer wait times when compared with Cash or Stocks and Shares ISAs. Once you sell your interest in the underlying peer-to-peer loan and submit a withdrawal request, it can take up to 30 days for the proceeds, after any applicable fees, to be paid to you.  

How long does it take to close an ISA? 

Cash ISA timings 

Closing a Cash ISA is the quickest and easiest of all ISAs; in most cases, providers can close the account on the same day, particularly if the request is made online or via the mobile app.  

In some cases, when additional checks are required or an in-branch visit is needed, it may take up to three working days for funds to be released and the account to be closed. 

Stocks & Shares ISA timings 

In most cases, once investments are sold and settlements have occurred, cash can be withdrawn and the account can be closed. The full process can take several days to around a week, but this is dependent on the provider, the investment sale and administrative delays.  

LISA and JISA timings 

Timescales for the closure of a JISA depend on the child’s age, because they can’t be closed outright until the child turns 18.  

Similarly, it’s rarely advisable to close a LISA unless you’re over the age of 60, have a terminal diagnosis, or are buying your first home.  

Can you reopen an ISA after closing it? 

You can open a new ISA 

Closing an ISA does not prevent you from opening new ISAs again in the future, but there are rules that limit how and when you can do so. You can have multiple Cash, Stocks and Shares, and Innovative Finance ISAs open; your total contributions must fall within the £20,000 annual allowance. However, some providers may limit the number of ISAs you can hold with them at any one time. 

The only ISA to have more restrictions imposed on it is LISAs. Whilst it is possible to have multiple LISAs open, you can only contribute to one per tax year.  

Does reopening restore allowance? 

Your ISA allowance is set by the tax year and does not reset when an account is closed or reopened. Any money you have already contributed that tax year continues to count towards your annual allowance.  

Your ISA allowance resets only at the start of each tax year, on 6 April.  

Common mistakes to avoid when closing an ISA 

• Withdrawing instead of transferring 

When you transfer your money from one ISA to another, you keep those funds within the tax-free wrapper, meaning they continue to accrue interest without tax.  

If you withdraw funds from your ISA, any future interest will be subject to tax, and you may incur withdrawal penalties depending on the ISA type.  

• Triggering LISA penalties accidentally 

Triggering LISA withdrawal penalties can occur when you withdraw funds from the account for reasons other than buying your first property, or prior to turning the age of 60, which will incur a 25% withdrawal charge on the total savings.  

The only exceptions to withdrawing aside from the ones listed above are if the account holder is terminally ill or deceased.  

• Selling investments during a downturn 

A common mistake with a Stocks and Shares ISA is selling investments during a downturn. Once the point of sale has begun, the value of those stocks is locked in, and if the market recovers, you could realise a loss on that investment.  

It may be better to wait and see if the market bounces back before locking in the sale of investments or closing an S&S account. 

• Thinking closing resets allowance 

Your ISA allowance is set at £20,000 across all ISA types and resets at the start of the new tax year, which is the 6th April.  

Closing and reopening an ISA does not restore any ISA allowance you may have used. Any contributions made in a tax year are fixed, which can limit how much you are able to save tax-free until the tax year begins.  

• Not checking FSCS protection during transfer/closure 

While Cash ISAs are protected by the FSCS up to £120,000, that protection may be affected by where your money sits at each stage. During a transfer or after closing an ISA, funds may be held in a different account where protection rules differ. Verifying how your money is protected throughout the transfer process is particularly important when moving or holding significant sums.