May 9, 2018Would you like to know more about ISAs?
What is an ISA?
An Individual Savings Account or ISA is a tax-free scheme for saving. For investors, the returns from ISA savings are free of UK income tax and capital gains tax. For this reason, income and capital gains do not have to be entered on a tax return and funds can be removed from it at any time without a tax penalty.
With a maximum subscription of £20,000 per individual for tax year 2018-19, a married couple/ civil partners could currently jointly save £40,000 each year. If they saved this amount each year for ten years they would have a fund of almost £530,000 with fund growth at 5% compound per annum.
With a wide choice of investments that can underly an ISA, and its tax efficiency, an ISA is often the first port of call for an investor, particularly for higher rate and additional rate taxpayers and those restricted as to the amount of tax-relievable pension contributions they can make or benefits they can accrue because of existing pension provisions.
What do you need to know about ISAs?
Legal matters
- Beneficial ownership of the underlying investments must be with the investor, with the legal title lying with the ISA manager or their nominee, or jointly with the investor and either the ISA manager or the ISA manager’s nominee;
- Because beneficial ownership is with the investor they may enjoy the usual benefits of ownership, such as attending annual general meetings and receiving company accounts, but by arrangement with the ISA manager. Beneficial ownership cannot be transferred so an ISA cannot be gifted or assigned into trust, unlike a life assurance policy or an ordinary unit trust holding;
- The ISA manager claims all the available tax reliefs from HMRC on behalf of the investor;
- The investor takes out an ISA by making a subscription to the ISA manager who makes and holds investments on behalf of the investor.
Administration of your ISA
- HMRC Savings Schemes Office (SSO) administers the ISA scheme;
- Day-to-day management of an ISA must be in the hands of an ISA manager approved by the SSO;
- The investor may select the underlying investment themselves, called a self-select or non-discretionary ISA, or leave investment decisions to the ISA manager. This is a managed or discretionary ISA;
- A cash ISA can be switched, in whole or in part, to a stocks and shares ISA and vice versa;
- Money can be taken out of an ISA at any time. Before 6 April 2016 any money that was put back into the ISA to replace the money withdrawn earlier would have counted as a new subscription. Since 6 April 2016, however, a replacement subscription will not now count towards the annual subscription limit if made in the same tax year as that in which the withdrawal was taken (provided that the ISA manager is able to administer this);
- ISA managers can be changed at any time by asking the current ISA manager to make the transfer. The ISA manager may charge for this and sometimes the terms of an ISA mean that any transfer can only be made in cash which means any non-cash assets would need to be encashed before transfer;
- It is important to note that any transfer must be made directly between the ISA managers in order to ensure that the tax free status of the previous subscriptions is preserved. Otherwise, if the transfer is made via the investor it may be treated as a new subscription which could well exceed the subscription allowance for that particular year. If an investor were to close one ISA and open a new one with a new ISA manager this would count as a new subscription.
What are the Eligibility criteria?
To be eligible for an ISA, an individual must be:
- Resident in the UK for tax purposes or a Crown employee working overseas (or the spouse/ civil partner of such an employee). On ceasing to be UK resident, subscription must be stopped but any ISAs will remain in force and retain their tax benefits (although they may, of course be subject to local taxation overseas);
- Aged 18 or over, or aged 16 or over for a cash ISA;
- A spouse/ civil partner of a deceased ISA investor who can make an additional permitted subscription (APS), also known as a “surviving spouse” subscription of an amount up to the value of the deceased investor’s ISA at death. This additional permitted subscription is available even if the surviving spouse did not actually inherit the deceased’s ISA funds.
Subscribing for an ISA
- There is an annual tax year subscription limit for each individual. For tax year 2018-19 it is £20,000. An unused subscription amount cannot be carried forward;
- Subscriptions must be in cash, except where shares acquired under certain share option schemes are involved or where an additional permitted subscription (see section on “eligibility” above) is possible;
- Each tax year, an individual can invest in one of each type of ISA, or in one ISA. The amount invested in the different types of ISA can be split in any proportions (subject to any maximum subscriptions for specific types (e.g. Help to Buy ISA and Lifetime ISA) but the total investment must not exceed the annual subscription limit.
ISA investments
There are two main types of ISA:
- Cash ISAs
- Stocks and shares ISAs
Tax fundamentals
- There is no UK tax on dividends in a stocks and shares ISA (although tax credits – that were applicable for years up to and including 2015-16 – could not be reclaimed). Tax credits were abolished with effect from 6 April 2016;
- Interest is received free of UK tax in all ISAs;
- There is no capital gains tax on profits;
- ISA income and gains do not have to be reported on a tax return and are ignored for the High Income Child Benefit tax charge;
- ISA transfers can be made between the cash and stocks and shares components and vice versa, with no restrictions or tax implications;
- AIM shares held in an ISA are subject to the normal inheritance tax rules and can therefore qualify for 100% Inheritance Tax (IHT) business relief after two years of ownership.
What happens on Death of an ISA investor?
- On death income and capital gains which arise from the date of death cease to be tax exempt;
- Benefits can be paid out by the ISA manager in the form of cash;
- The transfer of investment assets underlying the ISA is transferred to the deceased investor’s estate;
- The value of an ISA at death will always form part of a deceased investor’s estate as an ISA cannot be gifted or assigned into trust to enable change legal ownership;
- A surviving spouse/ civil partner will be entitled to make an additional permitted subscription.
More Information about ISAs
Please see here for further information
How can Equerry help?
For a discussion about how ISA investments could benefit you, talk to us at Equerry Investment Management.
Important information: With investment, your capital is at risk. Tax benefits and allowances described in this document are based on current legislation and HM Revenue & Customs practice and depend on personal circumstances. AIM investments can be illiquid in nature and carry a higher degree of risk than other securities and are not, therefore suitable for some investors. You should not take, or refrain from taking, action based on the content and no part of this document should be relied upon or construed as any form of advice or personal recommendation.
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