ISAs Individual Savings Accounts
Individual Savings Accounts commonly known as ISAs allow people to save their money in a range of investments such as cash and stocks and shares. Unlike investing directly in these products, investing through an ISA provides certain benefits. An ISA is a “tax wrapper” in which you can place your savings and investments to protect them from paying certain taxes.
Any person over the age of 16 who is resident and ordinarily resident in the UK can buy a Cash ISA but cannot take out a Stocks and Shares ISA until attaining the age of 18. A Junior ISA is available to Children under 18 years of age who do not hold a child trust fund; the contribution limit for the 2012/13 tax year is unchanged at £3,600. An ISA cannot be held jointly or be held on behalf of another person.
ISA investments benefit from highly favourable tax treatment in that there is no personal liability to income tax or capital gains tax on income or growth arising from investments held within an ISA.
It is not possible for ISA managers to reclaim the 10% tax credit paid on UK dividends. There is however a 20% tax credit on funds that pay interest, such as bond funds (funds where at least 60% of the assets pay interest distributions and not dividend distribution).
In terms of capital gains tax, all capital gains are tax free but if you make any losses within your ISA these cannot be offset against gains made outside it.
You do not have to include details of ISA investments, income received or gains realised on your annual tax return. So whenever you take withdrawals, or cash-in your ISA you do not have to pay tax on the money withdraw.
ISAs cannot be subject to a trust arrangement and on death will end and form part of your estate for Inheritance Tax purposes. There will be no tax to pay on income or capital gains up to that date, but your personal representatives will have to account for tax on any income or gains arising after your death. The ISA manager will either sell the investments or pay the proceeds to your personal representatives (or a beneficiary of your estate), or transfer the investments directly into their hands.
Stocks and Shares ISA
Within a Stocks and Shares ISA you may hold investments such as individual stocks and shares, unit trusts, open ended investment companies, investment trusts.
Within a Cash ISA, you may hold bank and building society deposit accounts, National Savings and Investment products (except Savings Certificates and Premium Bonds) and investment or insurance products which aim to produce “cash” like returns such as money market funds.
You are able to invest up to £11,280 during the course of the tax year. You can invest up to £5,640 (the maximum permitted) into a Cash ISA and the balance in a Stocks and Shares ISA. For example you could invest £3,280 in a Cash ISA and £8,000 in a Stocks and Shares ISA. Alternatively if you do not invest in a Cash ISA you can invest the full amount of £11,280 into a Stocks and Shares ISA.
Cash ISA Transfers
It is possible to transfer cash saved in previous tax years in a Cash ISA, Mini Cash ISA or a Tessa Only ISA into a Stocks and Shares ISA without affecting your annual ISA contribution allowance.
It is not be possible to transfer money held in a Stocks and Shares ISA into a Cash ISA. Financial Advisers must make this a clear risk when recommending such a transfer
Stakeholder products have a given set of benchmarks laid down by the government to provide assistance to investors when choosing an ISA. To earn the name ‘Stakeholder’ the products have to meet conditions designed to ensure that they are straightforward and good value. Stakeholder ISAs replaced CAT-standard ISAs (‘CAT’ stands for fair Charges, easy Access and decent Terms). If you took out a CAT-standard ISA it will continue to meet the CAT standards. Having said this, Stakeholder and existing CAT standard products are not approved nor their performance in any way guaranteed by the government.
Child Trust Funds
From age 18 it is now possible for children to roll all the money saved in a child trust fund into an ISA without affecting their annual ISA investment allowance allowing the money to remain invested in a tax efficient environment.