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Individual Savings Accounts
Successive governments, concerned at the relatively low level of savings in the UK economy have over the years introduced various means by which individuals can save through a tax-free environment.
What is an ISA?
ISAs are tax-exempt savings accounts available to individuals aged 18 or over who are resident and ordinarily resident in the UK. ISAs are only available to individual investors and cannot be held jointly.
ISAs are guaranteed to run for ten years although there is no minimum period for which the accounts must be held.
The overall annual savings limit is £15,240 for 2016/17 increasing to £20,000 from April 2017.
Investors are allowed to invest in a cash ISA, an investment ISA, an Innovative Finance ISA, or a combination of the three subject to not exceeding the overall annual investment limit.
Investors are to transfer their investments from a stocks and shares ISA to a cash ISA (or vice versa).
ISAs are allowed to invest in cash (including bank and building society accounts and designated National Savings), stocks and shares (including unit and investment trusts and government securities with at least five years to run) and life assurance.
A wide range of securities including certain retail bonds with less than five years before maturity, Core Capital Deferred Shares issued by building societies, listed bonds issued by Co-operative Societies and Community Benefit Societies and SME securities that are admitted to trading on a recognised stock exchange are eligible to be held in a ISA, Junior ISA or Child Trust Fund (CTF).
A recent introduction is the Innovative Finance ISA, for loans arranged via a peer-to-peer (P2P) platform. Peer-to-peer lending is a small but rapidly growing alternative source of finance for individuals and businesses. The Innovative Finance ISA may also invest in debt securities offered via crowdfunding platforms.
Withdraw and replace monies
From 6 April 2016, ISA savers may be able to withdraw and replace money from their cash ISA without it counting towards their annual ISA subscription limit for that year where they hold a ‘Flexible ISA’.
Additional ISA allowance for spouses on death
An additional ISA allowance is available for spouses or civil partners when an ISA saver dies. The additional ISA allowance is equal to the value of a deceased person’s accounts at the time of their death and is in addition to the normal ISA subscription limit. There are time limits within which the additional allowance has to be used. In certain circumstances an individual can transfer to their own ISA non-cash assets such as stocks and shares previously held by their spouse.
In most cases it is envisaged that the additional allowance will be used to subscribe to an ISA offered by the same financial institution that provided the deceased person’s ISA. As the new regulations allow the transfer of stocks and shares directly into the new ISA, in many cases the effect will be that the investments are left intact and the spouse becomes the new owner of the deceased person’s ISA.
The tax advantaged treatment of ISAs continue whilst an individual's estate is in administration.
The income from ISA investments is exempt from income tax.
Any capital gains made on investments held in an ISA are exempt from capital gains tax.
Uses of an ISA
Many people use an ISA in the first instance, to save for a rainy day. Since they were first introduced people have used them to save for retirement, to complement their pension plans or to save for future repayment of their mortgage to give just a few examples. We have known young people, wary of commitment to long-term saving start an ISA and when more certain of the future use it as a lump sum to start another financial plan.
Help to Buy ISA
The government has introduced the Help to Buy ISA, which provides a tax free savings account for first time buyers wishing to save for a home.
The scheme will provide a government bonus to each person who has saved into a Help to Buy ISA at the point they use their savings to purchase their first home. For every £200 a first time buyer saves, the government will provide a £50 bonus up to a maximum bonus of £3,000 on £12,000 of savings.
Help to Buy ISAs are subject to eligibility rules and limits:
Once an account is opened there is no limit on how long an individual can save into it and no time limit on when they can use their bonus.
A new Lifetime ISA will be available from April 2017 for adults under the age of 40. Individuals will be able to contribute up to £4,000 per year and receive a 25% bonus on the contributions from the government. Funds, including the government bonus, can be used to buy a first home at any time from 12 months after opening the account, and can be withdrawn from age 60 completely tax-free.
Further details of the new account, which will be available from 2017, are as follows:
Junior Individual Savings Account (Junior ISA)
Junior ISAs are available for UK resident children under the age of 18 who do not have a Child Trust Fund account. Junior ISAs are tax advantaged and have many features in common with ISAs. They can be cash or stocks and shares based products. The annual subscription limit for Junior ISA and Child Trust Fund accounts is £4,080 for 2016/17 (£4,128 for 2017/18).
A transfer of savings from a CTF to a Junior ISA is permitted at the request of the registered contact for the CTF.
How we can help
Please contact us if you would like any further information on ISAs.
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