What is an ISA?
ISAs followed the Government withdrawal of the facility to take out a new ‘Tax Exempt Special Savings Account’ (TESSA), or invest into a ‘Personal Equity Plan’ (PEP).
The Individual Savings Account (ISA) is an umbrella, which shelters investments from the burden of tax.
Individual Savings Account (ISA)
The amount you can invest in the tax year 2018/19 is £20,000.
You are able to split the ISA allowance as you wish between a Cash ISA and Stocks & Shares ISA. Plus you are able to transfer from a Stocks & Shares ISA to a Cash ISA, and vice versa.
Since April 2015, Children with existing Child Trust Funds are able to transfer these investments to Junior, which provide far wider investment options.
To further increase the choice that ISA savers have about how they invest, ISA eligibility will be extended to peer-to-peer loans, and all restrictions around the maturity dates of securities held within ISAs will be removed. Since April 2016 a new ‘Innovative Finance ISA’ allows peer-to-peer savers to lend out up to the annual allowance within an ISA wrapper, so interest on that portion of savings will be tax free. (Junior ISAs have been excluded from the scope of the Innovative Finance ISA, at least for the time being.)
Warning – money invested in peer-to- peer services is not covered by the Financial Services Compensation Scheme (FSCS), which can protect your savings in the event of an authorised firm becoming insolvent or ceasing trading. Innovative Finance ISA savers need to be aware that their capital may be at risk and their investment may not perform to the level they hoped.
Savers can withdraw and replace money from their Cash ISA in the same tax year without it affecting their annual ISA subscription limit.
Help to Buy ISA
In autumn 2015, a new ‘Help to Buy’ ISA was introduced for those saving to purchase their first home. Accounts can be opened with an initial deposit of up to £1,200 and will be available through banks and building societies. Up to £200 per month can be saved in the account and for every £200 saved, the government will add a bonus of £50 (capped at a maximum of £3,000).
The bonus will be available on home purchases of up to £450,000 in London and up to £250,000 outside of London and will be paid when the house is purchased.
The minimum government bonus is £400, meaning that you need to have saved at least £1,600 into your Help to Buy ISA before you can claim your bonus. The maximum government bonus you can receive is £3,000. To receive that, you need to have saved £12,000.
The Help to Buy ISA scheme – (Due to end in November 2019)
Lifetime ISA for homebuyers and retirement
The Lifetime ISA launched April 2017, permits savers between the ages of 18 to 40 to receive a 25% bonus from the government. Savers will be able to put in up to £4,000 a year, with the annual bonus of up to £1,000 paid until the age of 50. It will be possible to have both a standard and a Lifetime ISA, subject to the £20,000 limit.
Savers who have already taken out a Help to Buy ISA will be able to move their money into a New Lifetime ISA. If you have both types of ISA, you will only be able to use the bonus from one of them to buy a home.
Savers would be able to withdraw money from a Lifetime ISA at any time, and would not pay any tax on it.
Those wanting to use the money to buy a home will be able to do so after just a year; those wanting to use it for retirement will have to wait until the age of 60. Investors will be able to put their money into either cash, or a stocks and shares ISA.
Those using the Lifetime ISA to buy property can spend up to £450,000 on a home, but they have to be first-time buyers. Accounts are limited to one per person rather than one per home – so two first time buyers can both receive a bonus when buying together
You will be allowed to withdraw money in the event of ‘other life events’ such as a terminal illness. But if you wanted to take money out for other reasons then you will not qualify for the bonus and will also have to pay a 5% charge.
Who can invest in an ISA?
To be able to open an ISA an investor must be:
- 18 and over (age 16 and over for Cash ISA’s only)
- Resident in the UK for tax purposes
- Junior ISAs are long term, tax-free savings accounts for children aged 16 and 17.
Since 3rd December 2014, surviving spouse’s have an additional ISA allowance equal to the amount the deceased spouse had in their ISA, which can be used on or after 6th April 2015. There will be no impact on the spouse’s/civil partner’s own ISA annual allowance.
ISA accounts left to a spouse or civil partner will continue to pass IHT free, the transfer itself being covered by spousal exemption. The difference now being that the continuing returns on a deceased partner’s savings will be tax free.
How ISAs are structured?
You are allowed to have a different ISA provider in each new tax year, or if for example, you have taken out a Cash ISA with one provider you can effect a Stock and Share ISA with the same or different provider. In addition you may also transfer all or part of an investment from one ISA. Payments made to the Cash component of an ISA will be able to be transferred to an ISA Stocks and Shares component.
You are able to transfer from a Stocks & Shares ISA to a Cash ISA, and vice versa. The investment can be made by single lump sum contributions, by regular monthly/yearly contributions or by mixture of the two. Contributions paid into an ISA do not attract tax relief.
ISA Transfers 2018 / 19
Investors can transfer:
- Current year subscriptions in whole, and/or
- Previous years’ investments in whole or in part.
ISA savers will be able to transfer money saved in their Cash ISA to their Stock and Share ISA. Such transfer must be the whole amount saved in the Cash ISA for that tax year, up to the day of the transfer. If you transferred from a Cash ISA to a Stock and Shares ISA it will be treated as though your Cash ISA had not existed for that tax year and you would still be able to invest into a Cash ISA up to the maximum amount for that tax year.
Transfers of previous years’ investments have no effect on the current year’s subscription limits providing you have not withdrawn the money yourself and you have asked, for example, the new Cash ISA provider to have arranged the transfer. If you withdraw the current year’s subscriptions from your Cash ISA and then reinvest the money yourself into a new Cash ISA this will count towards your annual ISA allowance.
What is the tax position?
ISAs are extremely tax-efficient.
- You do not pay any income or capital gains tax on returns from an ISA.
- You do not have to declare ISA income and gains on a tax return.
- Any interest earned on the cash component is paid or accumulated gross.
- The investment funds incur no liability to Capital Gains Tax.
What investments can be made?
An ISA can either be Cash or Stocks and Shares, or a combination of both.
The following is a list of the acceptable investment holdings of each component of the ISA.
- Stocks & Shares, which may include authorised Unit Trusts, Open Ended Investment Companies, Investments Trusts, Gilts, Corporate Bonds and Individual Company Shares.
Shares acquired by employees from an approved all-employee savings-related share option and/or profit sharing scheme’ may also be transferred into this component.
- Cash, which may include certain Bank or Building Society deposits, specified National Savings accounts and Cash Units Trusts.
ISAs in general are very flexible investment vehicles with no fixed term and withdrawals can be made at any time. However specific products may have certain limitations on the access available to their investment. For example, while you can normally withdraw money from a Cash ISA within normal banking time scales, there may be a penalty if an investor has elected to subscribe to a notice account in return for a higher rate of interest.
Additionally, subscribers to a Stocks & Shares ISA must bear in mind that an ISA is an equity based investment and, therefore, returns will fluctuate. The value of the ISA can fall as well as rise and there can be no guarantee as to future returns.
The ISA does provide a spread of risk across a pool of equities and long-term past performance has demonstrated that equity investment can provide a hedge against inflation. However, past performance can provide no guarantee as to future returns. A Stocks & Shares ISA must, therefore, be considered as a medium to long term (5 to 7 years plus) investment, and in the majority of cases investors should not be considering needing access to their capital prior to this time scale.