Tax: Investing in ISAs by 5 April
Choosing the right ISA can be tricky, given the bewildering array of tax rules and investment risks, and Donald Drysdale reminds readers that the 5 April deadline is rapidly approaching.
The rules regarding Individual Savings Accounts (ISAs) have been altered by successive Chancellors. Some changes have simplified the regime and made it more attractive, while others have added unwelcome complexity.
ISAs offer opportunities to shelter significant investments from tax, especially if full advantage is taken of each year’s maximum ISA subscription.
There are three main types of ISA – cash ISAs, stocks and shares ISAs and innovative finance ISAs. Cash ISAs are available to anyone aged 16 or over. In all other cases, the investor must be aged 18 or over.
Income from ISA investments is exempt from income tax, and gains on their eventual disposal are exempt from capital gains tax. The basic subscription limit for cash, stocks and shares and innovative finance ISAs for 2018/19 is £20,000 and will be the same for 2019/20.
Special rules apply to ISAs held on emigrating from the UK, or on the investor’s death.
The main types of ISA
Cash ISAs may include savings in bank and building society accounts and some National Savings and Investments products. Some cash ISAs are flexible, allowing funds to be withdrawn and replaced within a particular tax year without affecting the subscription limit for that year.
Stocks and shares ISAs may include shares in most quoted companies, unit trusts and investment funds, and corporate and government bonds. The precise range of investments available depends on the chosen ISA provider.
Existing non-ISA shares can’t be transferred into a stocks and shares ISA unless they’re from an employee share scheme. However, a ‘bed and ISA’ can be used – i.e. by selling a non-ISA holding and then subscribing the cash to invest in similar (or different) shares in the ISA.
Innovative finance ISAs may include peer-to-peer loans and crowdfunding debentures. Any non-ISA peer-to-peer loans already made or crowdfunding debentures held can’t later be transferred into such an ISA.
A lifetime ISA, which may include either cash or stocks and shares or a mixture of both, can be opened by an individual aged 18 or over but under 40.
The individual may invest up to £4,000 each year in the lifetime ISA until they reach 50, and this counts towards their annual ISA limit. The government will add a 25% bonus up to a maximum of £1,000 a year.
The investor may withdraw money from their lifetime ISA to buy their first home for £450,000 or less, or for any other purposes if they are aged 60 or more or if they are terminally ill with less than 12 months to live. They must pay a 25% charge if they withdraw cash or assets for any other reason.
A junior ISA can be opened for an individual under age 18 who doesn’t have a Child Trust Fund, and may include either cash or stocks and shares. An existing Child Trust Fund may be transferred into such an ISA.
The maximum subscription to a junior ISA is £4,260 in 2018/19, rising to £4,368 in 2019/20. Confusingly, those aged 16 or 17 can open both a junior ISA and a normal adult cash ISA, but on reaching 18 only an adult ISA can be opened.
The individual may take control of their Junior ISA account from the age of 16, but can’t withdraw the investment until they reach 18.
‘Help to buy’ ISAs
A so-called ‘help to buy’ ISA was designed to assist an individual saving to buy their first home and involves the government in topping up those savings by 25% (up to £3,000). This scheme is being phased out – on the pretext that it has been replaced by the lifetime ISA.
Transitionally, a new ‘help to buy’ ISA may be opened until 30 November 2019. Where an individual has opened such an ISA by that date, they may continue saving into it until 30 November 2029. They must claim their bonus by 1 December 2030.
Time to subscribe
Those with funds available for investment, who haven’t yet allocated their maximum subscription to ISAs for 2018/19, have only a month to go until the 5 April deadline. In practice, they should act sooner if they want to be sure that their subscriptions reach their ISA provider.
Where an additional permitted ISA subscription is made under the rules that apply following the death of a spouse or civil partner, the time limits are not tied to the end of the fiscal year but are determined by various different dates – the date of death, distributions from the estate and completion of administration.
Choosing an ISA
Would-be investors, faced with detailed tax rules and a bewildering choice of ISA providers and investment options, may turn to their tax agents for advice.
An ISA which shelters income or gains from tax will not necessarily produce acceptable investment returns, and many tax practitioners are not qualified to offer investment advice. They should ensure that they make the limits of their expertise clear, and draw to their clients’ attention the need to obtain appropriate professional advice.
Article supplied by Taxing Words Ltd