6th April 2019
Everything you need to know
2019/20 Tax Year
ISA Allowance per person
ISAs have never been better. With the UK Government raising the tax-free allowance by nearly a third and adding peer-to-peer lending to the list of permitted investments, Individual Savings Accounts are becoming more attractive and even more flexible.
ISAs are all too often assumed to be limited to cash savings accounts with low interest rates, but these days it’s also possible to invest in almost any listed company or investment within your ISA. Not only is any investment growth free of capital gains tax but so too is any dividend income or interest. The potential tax savings can be substantial and you don’t even need to declare an ISA on your Tax Return.
What is an ISA?
An ISA is one of the most tax-efficient ways to save or invest.
An ISA is not a ‘product’ or investment but instead it is a name given to a cash or investment account that benefits from generous tax advantages approved and promoted by HMRC and the UK Government. Any interest, dividend income or capital gain (the profit from selling an investment that has increased in value) earned within an ISA is tax-free. You don't even need to declare your ISA on your tax return.
ISAs are often misunderstood as being cash-only savings accounts offered by high-street banks with unattractive interest rates. In fact, it is possible to invest in a wide variety of investments in an ISA giving the opportunity to achieve tax-free investment returns.
Many of our clients they have been enjoying a regular tax-free income and withdrawals from their Stocks & Shares ISAs. With over 40 years of experience in managing clients' investments we have a pro-active approach to ISA savings. Where cash is not immediately available to invest into an ISA we will look at a client’s wider investments and transfer the full allowance from their investment portfolio automatically.
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What are the risks?
All investments are subject to some degree of risk and an investment’s value and performance may go up as well as down. You may not always get back all of your investment and there may be a cost associated with any product you purchase or sell. Past performance is not always an indication of future performance.
In this example, a husband and wife could stand to make a substantial tax-saving on investment growth by investing in a Stocks & Shares ISA instead of using a general investment account or cash ISA.
A married couple are both Higher Rate tax payers and have been able to use their maximum ISA allowances for the last 10 tax years. This means they have been able to save just under £250,000 between the two of them.
These are some of the options that have been available to them:
ISA savings and growth over 10 years
Sample annual growth rate
Less tax due
Declare on Tax Return
General Investment Account
If they had both invested into a standard general investment account each with no tax benefits:
At 7% compound growth per annum, their combined investments would have grown by approximately £74,000 over 10 years but they would now face a Capital Gains Tax bill of around £10,000 and/or income tax at their marginal rate
Stocks & Shares ISA
If, instead, they had both invested into a Stocks & Shares ISA each:
At 7% compound growth per annum, their combined investments would have grown by approximately £74,000 over 10 years leaving no tax to pay at all
If they had both saved using a cash ISA each:
The maximum they would have been able to save into Cash ISAs would be just under £190,000 between the two of them over 10 years*
At an interest rate of 2% per annum, the combined interest they could have earned tax-free would be just over £15,000
N.B. Capital gains tax allowance used per person in 10th year to realise investment sales. For the purpose of this illustration over 10 years no changes have been made to the underlying investment holdings, no dividends or interest have been generated and all figures have been rounded and approximated. Investment returns are net of initial fees, investment management charges and platform charges. This example is an illustration only, should not be compared to your own circumstances and should not be treated as advice. Actual returns will depend on investment choices, investment performance, market conditions and 3rd party charges. Past performance is not a guarantee of future performance. *Between 2008 and 2014 the maximum contribution permitted into a cash ISA was 50% of the total ISA allowance. Charts and diagrams not to scale.
ISA Criteria & Allowance
Any UK resident aged 18 or over (16 for Cash ISAs) can invest in an ISA. There is no upper age limit and your money can be withdrawn whenever you choose**. Once an ISA account is opened, transferring to a new provider or switching a cash ISA into a Stocks & Shares ISA is straightforward.
Your ISA allowance determines how much you can invest in ISAs each tax year. The limit is set by the Government and often increases each tax year, although you do not have to use it all if you don’t want to. Your ISA allowance is not based on investment growth or interest, but simply the amount you are permitted to contribute. If you reach your ISA limit, you cannot invest or save any more money in an ISA until the start of the next tax year.
**Some investments such as property funds can, by their very nature, be more difficult to sell so you it may not be able to encash or switch out of an investment like this exactly when you want to.
You may split your allowance across the different types of ISA however you choose, as long as the combined amount doesn’t exceed £20,000 and you don’t put more than £4,000 in a Lifetime ISA.
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Other types of ISA
If your child is under 18 you can save tax free into a Junior ISA in the child’s name. The maximum Junior ISA allowance in the 2019/20 tax year is £4,368. You can invest the whole of your child’s ISA allowance in a Junior Stocks & Shares ISA or save it all in a Junior Cash ISA or split the allowance across the two.
Savers aged 16-18 can save £20,000 in a normal Cash ISA as well as paying £4,368 into a Junior ISA in the 2019/20 tax year in addition. Junior ISAs benefit from the same tax advantages as normal ISAs.
A Junior ISA is converted into a normal ISA when the saver turns 18.
The Lifetime ISA was launched in April 2017 to help savers buy their first home or save for later life. Those between the ages of 18 and 40 are eligible to open a Lifetime ISA and are able to contribute up to £4,000 each year until the age of 50. The government will add a 25% bonus which will grow tax-free alongside any contributions.
Investors are able to put their money into either Cash or Stocks & Shares and similarly to standard ISAs any interest, capital gains or dividends are tax free. It is possible to have both a standard and a Lifetime ISA, but any contributions to the Lifetime ISA count towards the ISA limit each year.
The chancellor has said that savers would be able to withdraw money from a Lifetime ISA at any time and would not pay tax on it. They will however, have to pay a 25% withdrawal charge unless a ‘life event’ such as a terminal illness has taken place. Those wanting to use the money to buy a home can do so after just a year; those wanting to use it for retirement have to wait until the age of 60.
Those using the Lifetime ISA to help buy a property can spend up to £450,000 on a home, but they have to be first-time buyers. If the property is being bought with someone else they can also use their Lifetime ISA to help fund the property. If the Lifetime ISA is not used for a first-time buyer property purchase the monies are tied up until the age of 60 in order to avoid the withdrawal charge.
Those who have already taken out a Help to Buy ISA are only allowed to use the bonus from one of the accounts.
Launched in April 2016 a Flexible ISA allows you to replace withdrawn money without it counting towards your ISA allowance, as long as it is returned within the same tax year. HMRC maintain a central record of all ISA subscriptions so you are responsible for ensuring that you stay within the ISA allowance by keeping track of any withdrawals and additions. Only certain providers are offering a Flexible ISA at this stage.
First-time property buyers can open a Help to Buy ISA up to December 2019 and continue to save into existing accounts beyond that date. The Government will add a 25% bonus to whatever is in the account at the point you choose to buy a property up to December 2030. The bonus will range from a minimum of £400 up to a maximum of £3,000, when you have saved at least £12,000.
You must be UK resident, have not owned a property anywhere in the world previously and the property must be purchased with the aid of a mortgage. The maximum purchase price is £250,000, or £450,000 in London.
The Help-to-Buy ISA is a Cash ISA and you are only entitled to invest in one Cash ISA per tax year. In the first month you can invest £1,200 with up to £200 in following months.
Innovative Finance ISA
The Innovative Finance ISA (IFISA) allows savers to use some or part of their annual ISA investment allowance to receive tax-free interest and tax-free capital gains on funds lent through FCA-regulated peer-to-peer Lending platforms. Peer-to-peer lending, often abbreviated as P2P and also known as ‘crowd lending’, is a rapidly growing form of lending that serves three key sectors; personal loans, small business loans and property loans. All three forms of P2P loan are permitted under the new Innovative Finance ISA. The scope of the IFISA does not extend to include equity-based investing.
The rates offered by IFISA providers are typically around double the rates offered by Cash ISA providers. The IFISA providers are able to do this for a number of reasons – the key premise being that peer-to-peer lending cuts out the “middle man” bank, allowing borrowers to pay less in interest but also allowing investors to receive more.
Peer-to-peer lending is not without risk and this is not merely a case of comparing interest rates on a like-for-like basis against bank or building society Cash ISA accounts.
The higher rates of interest which are achievable under peer-to-peer loans are considered to be higher risk and, crucially, unlike a UK bank or building society account, peer-to-peer lending is not currently protected by the Financial Services Compensation Scheme (FSCS).
Lenders’ capital is entirely at risk and lenders may receive back less than the value of their original investment.
Inheriting an ISA
Additional Permitted Subscriptions (APS): Following new rules introduced in 2015, when someone with an ISA passes away it is effectively inherited by their surviving spouse or civil partner. Previously, the tax efficiency of an ISA was lost on death. The implications of this new rule are considerable for anyone with an ISA. For larger accounts especially, this could save thousands of pounds in Capital Gains Tax and Income Tax.
How it works: the surviving spouse can apply for an additional ISA allowance equal to the higher of the value of the ISA held by the deceased on the date of death, or the value of the ISA when it is transferred
Any investments or cash held within the ISA will be distributed in the usual way according to the Will. The spouse is entitled to the additional allowance even if the investments have been left to someone else, or have been used to meet expenses from the estate. The additional allowance can be made in cash or through the direct transfer of the late partner’s ISA investments to the survivor. Different timescales apply to these two methods.
In accordance with the will anyone other than a surviving spouse - such as children, relatives or friends of the deceased - can inherit the money but the tax benefits of the ISA will fall away once it has been distributed.
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