Do You Pay Capital Gains Tax on an ISA? Limits, Losses, and Exceptions

Investments held inside an Individual Savings Account are exempt from Capital Gains Tax, so there is no CGT on an ISA no matter how large the profit becomes when you sell shares, funds, or bonds inside the wrapper. The same exemption covers dividends from shares you hold and interest paid on cash or bonds inside the account. You don’t declare any of it on your Self Assessment return.¹

There is no cap on how much the investments inside your ISA can grow. The limits apply only to how much new money you put in each year, not to the returns those investments generate. An ISA funded with modest contributions decades ago could now hold hundreds of thousands of pounds in gains, all of it permanently shielded.

What the Exemption Is Actually Worth

For the 2026/27 tax year, Capital Gains Tax on shares and most other assets is charged at 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers.² Those rates apply to gains above the annual exempt amount, which now sits at £3,000 per person.

That allowance has shrunk hard. It was £12,300 in 2022/23, then £6,000, and now £3,000 where it remains frozen. The smaller it gets, the more valuable an ISA becomes. A higher rate taxpayer selling £20,000 of gains outside an ISA would owe roughly £4,080 in CGT after the exempt amount. Inside the ISA, the bill is nothing, and no reporting is required.

The £20,000 Contribution Limit

The annual ISA allowance for the 2026/27 tax year is £20,000.¹ That total covers all your ISA contributions combined, split however you like between a Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, or Lifetime ISA. Since rule changes that took effect in April 2024, you can open multiple ISAs of the same type in the same tax year, provided your total stays within the cap.

Going over the £20,000 has real consequences. HMRC treats the excess as an invalid subscription and the tax-free status on those surplus funds is lost. HMRC can sometimes “repair” the ISA by removing the excess, but all tax relief on the oversubscribed amount is lost up to the date of the repair notice.³ If the account can’t be repaired, it must be voided for that tax year. This is one of the few genuine ways to lose ISA protection, so keeping a running total across providers matters.

Losses Inside an ISA Don’t Count

The flip side of tax-free gains is that losses inside an ISA are invisible to the tax system. Outside an ISA, if you sell an investment at a loss you can deduct it from other gains to reduce your CGT bill and carry unused losses forward to future years.⁴ Inside an ISA, that mechanism doesn’t exist. Since the government never taxes the gains, it doesn’t recognise the losses either.

This matters more than most people realise. If you hold a poorly performing fund inside your ISA and a profitable investment in a regular brokerage account, you can’t use the ISA loss to reduce the tax on the brokerage gain. The ISA loss simply evaporates. It can’t be carried forward, set against gains elsewhere, or claimed in any future year. For investors with substantial holdings both inside and outside ISAs, this creates a real strategic question about which assets belong in the wrapper. High-growth investments with the biggest expected gains tend to benefit most from ISA protection. Assets you might sell at a loss can be more useful in a taxable account where that loss has value.

Moving Existing Investments Into an ISA

You cannot transfer shares directly from a regular brokerage account into an ISA. HMRC requires all ISA contributions to be made in cash, so a process known as “Bed and ISA” is needed. You sell the shares in your taxable account, deposit the cash into your ISA (within the £20,000 annual allowance), and then repurchase the same investments inside the wrapper.

The sale in your taxable account counts as a disposal for Capital Gains Tax. If the shares have risen in value since you bought them, profit above the £3,000 annual exempt amount triggers a CGT bill.² Run the maths before you start. Paying 18% or 24% now in exchange for permanent tax-free growth only makes sense if you expect enough future growth to recover the upfront cost. For investments with small unrealised gains, Bed and ISA is almost always worthwhile. For investments sitting on large gains, spreading the process across multiple tax years to stay within the exempt amount each year is a common approach.

The 30-Day Share Matching Trap

A subtle rule catches people who sell shares and immediately rebuy the same ones inside an ISA. Under HMRC’s share matching rules, when you sell shares the disposal is matched against acquisitions in a specific order: first, shares bought on the same day; second, shares bought within the following 30 days; and third, all remaining shares in your “Section 104” holding, which is the pooled average cost of your older shares.⁵

Here’s where it bites. If you sell shares in your taxable account and repurchase the identical shares inside your ISA within 30 days, the repurchase cost gets matched against the disposal. The gain you thought you were crystallising at a low tax cost may not actually be crystallised at all. The original acquisition cost carries forward to a future disposal instead. To avoid this, you can wait 30 days before repurchasing (accepting the market risk of being out of the investment), buy a similar but not identical fund inside the ISA, or use the period to rebalance your portfolio. This is where most Bed and ISA mistakes happen.

What Happens When the Holder Dies

An ISA doesn’t immediately lose its tax-free status when the holder dies. The investments remain exempt from Income Tax and Capital Gains Tax until whichever comes first: the executor closes the account, the estate administration completes, or three years and one day after the date of death.⁶ During that window the portfolio can continue to grow without triggering tax for the estate. ISA holdings do still form part of the estate for Inheritance Tax purposes.

A surviving spouse or civil partner receives an Additional Permitted Subscription, which is an extra ISA allowance on top of the standard £20,000. The APS equals the higher of the ISA’s value at the date of death or its value when the continuing ISA period ends. It sits alongside the survivor’s own annual allowance, so a substantial additional lump sum can be sheltered.⁶ The APS must be used within three years of the date of death, or within 180 days of estate administration completing, whichever is later. It can be used in one contribution or spread across several. The couple must have been married or in a civil partnership and living together at the time of death; formally separated couples do not qualify.

US Citizens: The Exemption Does Not Apply

The ISA’s tax-free status is a UK tax concept. The United States does not recognise it. If you’re a US citizen or green card holder living in the UK, the IRS treats your ISA as an ordinary foreign financial account, and all the gains, dividends, and interest inside it are taxable on your US return.

The reporting requirements add complexity. If the total value of your foreign financial accounts exceeds $10,000 at any point during the year, you must file a Report of Foreign Bank and Financial Accounts with FinCEN.⁷ Separately, if your specified foreign financial assets exceed $50,000 on the last day of the tax year (or $75,000 at any point), you must also file Form 8938 with your tax return.⁸ Higher thresholds apply for joint filers and taxpayers living abroad.

Many UK-domiciled mutual funds and investment trusts are classified as Passive Foreign Investment Companies under US tax law. That classification brings punitive tax treatment and requires a separate Form 8621 for every PFIC investment, every year. It eliminates favorable long-term capital gains rates and can substantially increase the US tax bill. US citizens with UK ISAs holding pooled funds should get specialist cross-border tax advice, because the filing obligations alone can cost more than the ISA’s UK tax savings are worth.

1
GOV.UK. Individual Savings Accounts (ISAs) – How ISAs Work
2
GOV.UK. Capital Gains Tax – What You Pay It On, Rates and Allowances
3
GOV.UK. How to Close, Void or Repair an ISA
4
Legislation.gov.uk. Taxation of Chargeable Gains Act 1992 – Section 1F
5
Aberdeen Standard Capital. CGT and Share Matching
6
GOV.UK. Individual Savings Accounts (ISAs) – If You Die
7
FinCEN. Report Foreign Bank and Financial Accounts
8
Internal Revenue Service. Do I Need to File Form 8938, Statement of Specified Foreign Financial Assets?