THE EDUCATION SECTION Updated March 2017 ISAs – all you need to know Key points • An ISA is an Individual Savings Account that enables you to save or invest money without paying tax on the interest or on the investment returns you receive. • To open an ISA, you need to be a UK resident for tax purposes and aged 16 or over. For some ISAs, you may need to be 18 or over. • For each tax year, there is a limit to the amount you can deposit into your ISA – this is your annual allowance. The allowance for the 2017/2018 tax year is £20,000, which you can invest in a cash ISA, an investment ISA or a combination of the two. • Each tax year - 6 April to 5 April - you can either open a new ISA or top up an existing ISA until you reach your annual allowance. You’ll then earn tax-free interest on your whole balance every year. A brief history of tax free savings accounts • ISAs replaced Personal Equity Plans (PEPs) and Tax-exempt Special Savings Accounts (TESSAs) on 6 April 1999. • TESSAs were introduced in 1990 • PEPs were introduced in 1987 • Also since 1987 we must not forget the brief appearance of the Child Trust Fund, the TOISA (Tessa Only ISA), the mini ISA, the maxi ISA and NISA • We now have the Junior ISA, the Lifetime ISA, the Help 2 Buy ISA & the Innovative Finance ISA To invest in a stocks and shares ISA, the investor must be aged 18 or over. Individuals aged 16 and 17 can invest in a cash ISA. However if the capital is derived from a parent and the interest together with any other income from parental gifts is more than £100 a year, the income will be taxed as the parent’s income and may therefore not be tax-free. An ISA may only be arranged on an individual basis (not jointly) and can be neither assigned nor placed in trust. Cash invested in an ISA must belong to the investor, but could be the proceeds of a gift. Types of ISA There are 3 types of ISA: • the stocks and shares ISA • the cash ISA • the Junior ISA NOTE - Individual savers can invest in 2 separate ISAs in any one tax year, one cash ISA and one stocks and shares ISA. The stocks and shares ISA This may be invested in: o Virtually any unit trust, OEIC, UCITS or investment trust. o Any other retail collective investment schemes authorised by the Financial Services Authority, provided they do not restrict savers’ access to their savings. o Shares listed on any recognised stock exchange (but not Alternative Investment Market (AIM) shares). o Corporate bonds and European Economic Area (EEA) government securities, provided there is at least five years to redemption at the date of purchase. o A life assurance policy. o Cash. o Investment in the stocks and shares component can be in the form of a CGT-free direct transfer of shares received in the previous 90 days from a profit-sharing, share incentive ownership plan or save as you earn scheme. All other subscriptions must be in cash. Transfers of newly issued shares (e.g. windfall shares) are not permitted. The cash ISA o This may be invested in bank or building society deposits as well as money market unit trusts which hold deposits rather than securities. National Savings and Investments (NS&I) offers a direct cash ISA product. The Junior ISA (Only children under the age of 18 are able to invest in a Junior ISA.) o Junior ISAs replaced Child Trust Funds (CTF) and were launched on 1 November 2011 o All UK resident children under the age of 18 who do not have a Child Trust Fund (CTF) are eligible for Junior ISAs o Any income or gains will be tax-efficient o Both cash and stocks and shares Junior ISAs are available. Children are able to hold up to one cash and one stocks and shares Junior ISA at a time (two accounts in total) o There is an overarching contribution limit of £4,080 per year (2015/2016 tax year). o Accounts are owned by the child and funds will be locked in until the child turns 18 o Junior ISA accounts will by default become adult ISAs on maturity o Unlike the CTF, there is no government contributions or matched payments into accounts ISA investment limits • The overall ISA limit for 2017/2018 is £20,000 • The ISA also offers you the option to save your whole ISA allowance of £20,000 in cash, stocks and shares, or any combination of the two. o For example, you could choose to pay in: ▪ £20,000 to a Cash ISA and nothing to a Stocks and Shares ISA ▪ £20,000 to a Stocks and Shares ISA and nothing to a Cash ISA ▪ £10,00 to a Cash ISA and £10,000 to a Stocks and Shares ISA ▪ a combination of amounts between a Cash and Stocks and Shares ISA, up to the overall annual limit of £20,000 • Annual ISA allowances are aligned with the tax year, from 6 April to 5 April What happens if the ISAs limit is exceeded? • As it is possible to have a cash Isa with one provider and a stocks and shares Isa with another, there is a risk that an individual might pay in too much during a single tax year. HMRC recognises that this can happen accidentally, and may let you off with a warning letter if it's the first time this has happened. • Although each individual is responsible for keeping track of their ISA investments, the amount deposited in any ISA (cash or stocks and shares) will be notified to HMRC by each provider. At the end of the tax year, records for individuals will be checked, and any oversubscriptions or invalid deposits noted. • Where HMRC decides to take action, the ISA provider may be instructed to remove oversubscriptions and tax any income or growth the investor has received. If too much has been paid in, HMRC advises against trying to correct the mistake by drawing money out. HMRC will advise what action needs to be taken. Transfers between ISAs • You are able to open one Cash ISA and one Stocks and Shares ISA each tax-year. However, once open, you can transfer your Cash or Stocks and Shares ISA between providers as many times as you wish – whenever you like. • From 1 July 2014, any money you have in a Stocks and Shares ISA can be transferred to a Cash ISA. • If you wish to make a transfer you should approach the provider of the Cash ISA that you wish to transfer your funds to, who will contact the provider of your existing Stocks and Shares ISA to arrange the transfer. Obtaining additional ISA allowances following the death of a spouse or civil partner • Since 3 December 2014, where a person holding an ISA dies and that person was married or in a civil partnership, the surviving spouse/civil partner is entitled to an extra ISA allowance equal to the value of the ISA(s) held by their spouse/civil partner on the date of death (even where the spouse/civil partner does not actually inherit the ISA). This is referred to as the Additional Permitted Subscription (APS) allowance. • This allowance is regardless of what's in a Will, which means that even if the money is left for someone else to inherit, such as a son or daughter, the surviving spouse/civil partner is still entitled to an increased allowance equivalent to the value of the ISA assets on the date of death. • This allowance can be used with the ISA provider of the deceased or an ISA provider chosen by the surviving spouse/civil partner. If the spouse/civil partner selects a different ISA provider, the allowance is passed to that ISA provider. This can happen only once. Some ISA providers will allow the spouse/civil partner to make regular payments to use the allowance and some may only allow a one-off payment. Broadly, the time limit for using the allowance is 3 years from date of death. What happens to ISAs on death? • Assuming there is no surviving spouse the tax status of an ISA terminates on the date of the account holder’s death. Until notified, the ISA provider will continue to hold the investments, and the value will continue to rise and fall. All the assets in an ISA are valued at date of death, and gains built up before then (and of course losses too) are exempt from CGT, however an individual’s personal representatives will have to account for tax on any income or gains arising after death. Once notified, the ISA manager will either sell the investments and pay the proceeds to the personal representatives (or a beneficiary of the estate), or transfer the investments directly into their hands. The terms and conditions of the ISA may specify which it will be. Are ISAs subject to inheritance tax? • The key attraction of ISAs is that savings can accumulate free of income and capital gains tax, and that withdrawals are not subject to income tax. • However, in most cases, investments held within ISAs are not exempt from inheritance tax. • An exception to this arose in August 2013 when the government allowed shares in companies listed on the Alternative Investment Market (AIM) to be held in ISAs. Given that AIM-listed companies may qualify for business property relief, those investments are exempt from inheritance tax. However the transfer of ISA assets to AIM-listed shares to bypass inheritance tax is limited by the condition that the investor must have held the shares for at least 2 years to qualify. The volatility of AIM shares may also be unpalatable for some investors. What are the new 'flexible Isa' rules? • The government introduced a new optional flexibility for ISAs on 6 April 2016 so that you can take money out and put it back later in the year, without losing any of your tax-free entitlement. • The only condition is that you top up your Isa in the same tax year the withdrawal was made. If you put it back in the next year, it will count towards your new annual allowance. This will also apply to cash held in stocks and shares ISAs, but not Junior ISAs. • This flexibility is not compulsory and will not be available on all ISAs, however, so you should always check with your provider before withdrawing any money. Additional info • All income and capital gains are free of tax and do not have to be declared on a tax return. However, investments may suffer foreign withholding taxes. • The 10% tax credit on UK dividends cannot be reclaimed. • Interest received on bond investments is tax-free. • If cash is held in either component pending future investment, any interest it earns is subject to a flat 20% tax charge. • All ISA encashments are free of income tax and CGT. • All reporting to and reclaims from HMRC are undertaken by the ISA manager. ISA investors have to supply their National Insurance number, if they have one. • An ISA holder who ceases to be resident and ordinarily resident in the UK can keep the ISA with its tax benefits but cannot pay in any more money. ____________________________ Please do not hesitate to contact us if you would like further details or information.