ISAs and the Lifetime ISA
An ISA is a tax-free investment vehicle. When you invest your savings, shares or life insurance, as well as all authorised retail investment schemes and UK Real Estate Investment Trusts into an ISA account, your income and gains from the investments are free from income tax and capital gains tax. However, the value of your ISAs will be added to your estate for the purposes of calculating and liability to inheritance tax.
A Lifetime ISA is available for adults under the age of 40. Individuals are able to contribute up to £4,000 (as part of the overall 2018/19 allowance of £20,000) per annum and receive a 25% state bonus. Funds, including the bonus, can be used to purchase a first home at any time after the first annual anniversary of opening the account. Funds may be withdrawn from the age of 60. If the funds are used for other purposes, the government bonus is lost and the fund will be subject to a 25% exit charge.
We consider here some of the more common Frequently Asked Questions our clients have asked.
1 ) What is an ISA?
An ISA is a tax exempt savings account which is available to any individual aged 18 or over who is both resident and ordinarily resident in the UK. Any income received within an ISA is free of income tax. Similarly, any capital gain received on sale will be exempt and no details of your ISA will be required on your tax return.
2 ) How much can I invest in an ISA?
NOTE: The following ISA investment allowances are for the tax year 2019/20.
For those who are 18 and over, the annual investment limit is £20,000.
The limit for a junior ISA is £4,368. The 2019/20 limit for the lifetime ISA is £4,000 and is included in the £20,000 allowance. In other words the ISA maximum is £20,000 and not £24,000.
ISAs can be invested in stocks and shares and this may include investments in unit trusts, open ended investment companies, investment trusts, ordinary shares, fixed interest preference shares, corporate bonds having at least five years to maturity, all FCA-authorised retail investment schemes and UK Real Estate Investment Trusts, stakeholder medium term products and certain life insurance policies.
3 ) What tax advantages do ISAs offer?
All income earned on investments within an ISA is exempt from income tax. Assuming an average yield of 3% on an ISA (say, £4,000) this would be worth £54 to an additional-rate taxpayer but only £24 to a basic-rate taxpayer. However, if an ISA fund has built up to £500,000 the saving is worth £6,750 to an additional-rate taxpayer, £6,000 to a higher-rate taxpayer and £3,000 to a basic-rate taxpayer.
Gains made on investments held in ISAs are exempt from capital gains tax. However, ISAs are not exempt from inheritance tax.
4 ) Is there a specified minimum investment?
ISAs are not subject to a minimum investment. You can invest any amount up to the relevant annual limit.
5 ) Is there a minimum period of investment?
The ISA offers cash investors the same tax free conditions as share investors in that there is no lock-in period. Withdrawals can be made at any time without losing tax relief attributed to the account.
If funds are withdrawn and then replaced in the ISA before the end of the tax year, the replacement amount will not be regarded as a new investment so that the full investment limit is available for new savings.
6 ) Is there any risk associated with an investment in an ISA?
No if you invest in a deposit account paying interest. Otherwise yes, the majority of funds capable of investment into an ISA will purchase equity-based investments. You must therefore acknowledge the usual health warning that the value of such investments may go down as well as up. The sale of this element of any ISA will be monitored by the Financial Conduct Authority and expert advice from a regulated advisor should be sought prior to any investment.
Therefore, if your holding is primarily deposit or savings accounts the risk is reduced.
7 ) How do I invest in an ISA and who provides them?
ISAs are available from banks and building societies, insurance companies and a variety of other providers. In all cases the account is administered by managers and you have the choice of opting for a single plan manager who offers an account that can accept the overall subscription, or separate managers administering the two different components. Naturally an administration fee will be charged for the management of the account.