INDIVIDUAL SAVINGS ACCOUNTS
Individual Savings Accounts (ISAs) have come a long way since their birth 20 years ago. There are now five types of ISA, although this will drop to four by December:
|Type of ISA||Age Eligibility||Maximum contribution*
|Standard Cash/Stocks & Shares ISA||18 upwards, but 16-17 year olds may start a Cash ISA||£20,000||£20,000|
|Junior ISA(JISA)||Under age 18 without a Child Trust Fund (CTF)||£4,260||£4,380|
|Help to Buy ISA||16 upwards||£1,000 initially then £200 a month||£1,000 initially† then £200 a month|
|Innovative Finance ISA||18 upwards||£20,000||£20,000|
|Lifetime ISA(LISA)||18-39 for opening and no contributions possible after 49||£4,000||£4,000|
*The general rule is that the maximum total annual contributions to all ISAs in 2018/19 and 2019/20 is £20,000. However, a 16 and 17 year old can benefit from maximum contributions to a standard ISA (including Help to Buy) and a JISA (ie.a maximum of £24,260 in 2017/18 and £24,380 in 2019/20).
†Help to Buy ISAs will be closed to new investors from 1 December 2019. However, existing investors may continue to contribute.
Main tax benefits
There are four important tax benefits which are common across the different types of ISA:
- Interest earned on cash or fixed interest securities is free of UK income tax.
- Dividends are also free of UK income tax.
- Capital gains are free of UK capital gains tax (CGT).
- There is nothing to report on your tax return.Following changes made in recent years, all ISAs (other than JISAs) can effectively be inherited by a surviving spouse or civil partner. Thus, while ISAs cannot be joint investments, the inheritability makes them almost so.LISAs offer a 25% Government bonus for contributions made before age 50, eg the maximum £4,000 attracts an extra £1,000 top up. However, normally there will be a penalty of 25% of any amount withdrawn before age 60, other than if the funds are used towards the purchase of a first home (worth up to £450,000). LISAs are sometimes suggested as alternatives to pension arrangements, but in practice matters are more complicated. If you find yourself in the position of choosing between the two, take advice before making a decision.
Use it or lose it
ISA contributions operate on a simple tax year basis. If you do not contribute up to the maximum, you cannot carry forward your shortfall to future tax years. To gain the most from ISAs, you should aim to invest as much as you can afford each and every tax year. For example, had you placed the maximum in ISAs since they first were available, you would by now have sheltered over £200,000 from UK income tax and capital gains tax.
Contributions must be normally be in cash. While it would be convenient to transfer existing investments in funds or shares to an ISA, this is not permitted. In practice this prohibition is an accident of history, as these days it is usually possible to achieve a very similar result by selling an existing investment you hold personally and then immediately
repurchasing the same investment within an ISA. Depending upon the investment and how it is held, the move may involve costs, although these are normally minimal. The sale will count as a disposal for CGT purposes, but the gains could be covered by your annual CGT exemption (£11,700 in 2018/19).
Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change.The FCA does not regulate tax advice. This blogis provided strictly for general consideration onlyand is based on our understanding of law and HM Revenue & Customs practice as at January2019and the contents of the Finance (No 3) Bill 2017-19. No action must be taken or refrained from based on its contents alone. Accordingly,no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.
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