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Individual savings accounts (ISAs)ISAs offer UK savers a way to save or invest their money within a tax–favoured structure. This factsheet looks at the key features of ISAs and the benefits investment companies can offer as part of an ISA investment. ISAs were introduced in the spring of 1999 to replace Personal Equity Plans (PEPs) and Tax Exempt Special Savings Accounts (TESSAs) as a new way for UK savers to invest their money within a tax–favoured environment. When you save or invest through an ISA, the income and growth from your savings and investments are free of income tax and capital gains tax and you do not have to declare an ISA on your tax return. From April 2008 the overall annual investment limit will increase to £7,200 per tax year: A tax year runs from 6th April one year to 5th April the following year. An ISA is not itself an investment, but is what is often referred to as a “wrapper product”. It is simply a “wrapper” within which an underlying investment is held. Features of ISAs
There are rules regarding the type of investment which you can hold within an ISA. Eligible investments are divided into two
components, these are:
When investing within an ISA you can include one or both of these components. There are however strict rules regarding the maximum amount allowed in each component and the overall amount you can invest in any one tax year. From 6 April 2008, the overall annual investment limit is £7,200 per tax year. You are able to invest a maximum of £3,600 in cash and the balance in stocks and shares. In each year you are able to subscribe to one cash ISA and one stocks and shares ISA. You are not able to subscribe to two (or more) cash ISAs, or two (or more) stocks and shares ISAs in the same tax year. For example, an individual can save £1,000 in a cash ISA with one provider and £6,000 in a stocks and shares ISA with a different provider. ISAs from tax year 2008 onwards
Qualifying investments for stocks and shares There are strict rules that govern which investment companies, unit trusts, shares, bonds, insurance products and so on are eligible for inclusion in an ISA. For investment companies these rules include that their shares must be listed on an official list of a recognised stock exchange. This means for example that investment companies which trade on the Alternative Investment Market (AIM) are not eligible. The vast majority of investment companies qualify as ISA investments and you can find more information on these companies on our website. What are the benefits of ISAs The tax benefits of investing within an ISA are that you do not pay tax on the returns you receive from your ISA investments. In other words, you pay no tax on any of the income you receive from your cash or stocks and shares investments, this includes dividends, interest and bonuses. You also pay no tax on capital gains arising on your ISA investments. However losses on ISA investments cannot be used for Capital Gains Tax purposes against capital gains outside your ISA. Additional tax benefits
Transferring an ISA You are be able to transfer money saved in the current tax year in cash ISAs into stocks and shares ISAs but these transfers must be the whole amount that you have saved in that cash ISA up to the day of transfer. You can transfer your ISA to another ISA manager. You are allowed to transfer some or all of the money saved in previous tax years from cash ISAs into stocks and shares ISAs. Your ISA must be transferred directly between your existing ISA manager and the new one. Ask your existing ISA manager to arrange the transfer. Check the terms and conditions with your ISA manager to find out if you will be charged for transferring. You cannot arrange a transfer yourself by closing the first ISA and paying the money to another ISA manager. If you accumulate a number of ISA schemes over the years, it is important to review them from time to time. This is because your investment needs may have changed or it could be that the funds that you have been invested in have not performed as well as you might have expected. Changes to tax law It is important to realise that HM Revenue & Customs law and practice does change over time and that levels and bases of and reliefs from taxation are subject to change. For instance, prior to 6 April 2004 any dividends paid on UK company shares held within an ISA received a tax credit of 10% – which was passed on to the investor by the plan manager. So, for every £90 dividend the investor actually received £100. The repayable dividend tax credit was abolished in April 2004, reducing the overall benefits of stocks and shares ISAs, especially to standard rate taxpayers. Investors who are unsure of their tax status should obtain independent advice from a professional financial adviser, solicitor, accountant or stockbroker. PEPs Personal Equity Plans (PEPs) were replaced by ISAs in 1999. Since the introduction of ISAs, the rules which used to apply to PEPs have been changed and they are now the same as those which apply to ISAs. From 6 April 2008, all PEP accounts ceased to exist and became stocks and shares ISAs. Summary Investment companies can be a good way for smaller investors to benefit from an effective and cost-efficient investment vehicle and to gain exposure to a diversified portfolio. The flexibility and accessibility of investment companies can make them suitable for a wide range of financial planning objectives, including ISA investments, because of their low minimum investment levels and spread of risk. Investors who are unsure whether this investment is suitable to them should obtain independent advice from their professional adviser. It’s worth remembering that, although over the short term the stock market can be a volatile place, these ups and downs tend to even themselves out over time. Historically the stock market has outperformed bank and building society deposits over the longer term. The sooner you start the longer and greater chance your money has to grow. We have produced an ISA factsheet, See our factsheets for more information | |
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