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Individual Savings Account (ISA)

ISAs allow UK residents to hold investments free of income and capital gains tax. 

Individual Savings Account (ISA)

by
Rachael Cornwell + Stuart Walton

08.03.2019

Tax Year End series.  No 3: Individual Savings Account (ISA)​

By Rachael Cornwell & Stuart Walton of Charles Stanley Financial Planning.

One of the most common questions asked at this time of year surrounds end of year tax planning, in the third article on this subject, Rachael Cornwell and Stuart Walton take a look at ISAs and the four different types available.

In the 2018/2019 tax year the maximum subscription to an ISA is £20,000 which can be invested in a combination of cash or stocks and shares, provided the annual limit is not exceeded.

Benefits:

  • Gains realised on the sale of stocks and shares within an ISA are free from capital gains tax
  • Any dividends or interest income are also free of tax
  • In the event of the death of a spouse/civil partner, the surviving spouse/civil partner can inherit the ISA and retain the tax benefits.
  • ISAs are portable and can be transferred between providers without losing their tax free status.
  • Flexible ISAs permit funds to be withdrawn and replaced at a later date within the same tax year, up to the maximum subscription limit.

Junior ISA (JISA)

JISAs are long term, tax free savings accounts for children.

In the 2018/2019 tax year the subscription limit for a JISA is £4,260. 

Individuals can open a JISA if they have a child who is under the age of 18 and UK resident.  The parent is responsible for the management of the JISA and can make investment decisions, but the money within it belongs to the child.  From the age of 16 the child can take control of the account, but cannot withdraw funds from until they reach age 18.

Investors can have either a cash JISA or a stocks and shares JISA, or one of each, subject to the overall subscription limit.

Any interest on a cash JISA is tax free as is any capital growth or dividends received within a stocks and shares JISA.

JISAs do not count towards the annual ISA subscription limit of £20,000 as they are savings that belong to a child rather than the parent.

Lifetime ISA (LISA)

UK residents aged between 18 and 40 can open a LISA.  LISAs aim to help individuals buy their first home or build savings for retirement. 

The tax benefits and investment options are the same as those applicable to the ISA.

Contributions are limited to £4,000 per tax year until the age of 50.  It is important to note that these count towards the overall ISA allowance of £20,000.

Contributions made between the ages of 18 and 50 qualify for 25% government bonus up to a maximum of £1,000 per year.  Beyond age 50, contributions and the 25% bonus no longer apply but the account can remain open and accrue interest or dividends.

A 25% charge applies to withdrawals from the LISA unless money is withdrawn under the following circumstances.

  • To purchase a first home
  • Aged 60 or over
  • Diagnosed with a terminal illness with less than 12 months to live

Help to Buy ISA

Another alternative for saving for a first property purchase is the Help to Buy ISA.  UK residents aged 16 and over can open a Help to Buy ISA until 30 November 2019.

Like the LISA, the government will contribute a 25% bonus to qualifying first time buyers. In contrast to the LISA this is a purely cash based product offered by a number of banks and building society’s.

The first contribution can be up to £1,200 with subsequent contributions of up to £200 per month.  A minimum closing balance of £1,600 is required to qualify for a bonus of £400.  The maximum closing balance is £12,000 which will qualify for a bonus of £3,000.  Balances can exceed £12,000 but they will not qualify for a bonus beyond the maximum £3,000.

Again it is important to note that any contributions to a Help to Buy ISA in a tax year count toward the annual ISA subscription limit of £20,000.

 

Charles Stanley is not a tax adviser.  Information contained in this article is based on our understanding of current HMRC legislation.  Tax reliefs are those currently applying and the levels and based of taxation can change.  Tax treatment depends on the individual circumstances of each person or entity and may be subject to change in the future.  If you are in any doubt, you should seek professional tax advice.

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