Individual savings accounts

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.

ISA investment allowances

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.

An ISA is either a cash ISA or a stocks and shares ISA.

2 ) How much can I invest in an ISA?

A HMRC survey* of 1250 individuals concluded that:

one third of ISA holders had been encouraged to save by the existence of tax-free ISAs and approximately one quarter cited tax incentives as the principle reason for saving.
40% of ISA holders have saved £8,000 or more in their ISA account.
Mini cash ISAs were the most popular form of ISA
53% of ISA holders fund their ISAs from their income, while 28% fund their ISA by a transfer from taxable savings and 16% transferred funds from non-taxable savings.
14% reported that inheritances and gifts were the primary source of their ISA investments.
60% have never made a withdrawal from their ISA while 10% of ISA holders had made four or more withdrawals

*Individual Attitudes to Saving: Effect of ISAs on People's Saving Behaviour

NOTE: The following ISA annual investment allowances are for the tax year 2013/14.

For those who are 18 and over, ISAs have an annual subscription limit of £11,520, of which no more than £5,760 can go into a cash ISA.

Those under can invest up to £3,720 in a Junior ISA.

The cash element in an ISA can be in the form of deposits and savings accounts with banks, National Savings or Building Societies as well as other "cash based" investments.

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 FSA authorised retail investment schemes and UK Real Estate Investment Trusts, stakeholder medium term products and certain life insurance policies.

3 ) I've heard there are two types of ISA

That is correct.

There are two types of ISA - a cash ISA and a stocks and shares ISA.

The investment limit for ISAs is £11,520, of which no more than £5,760 can be in 'cash' (e.g. national savings). Invest smaller amounts in cash and the difference, up to the overall annual allowance of £11,520, can be in stocks and shares.

So, for example, you could invest:

Cash	£5,760
Stocks and shares	£5,760
Total	£11,520

4 ) What tax advantages do ISAs offer?

All income earned on investments within an ISA will be exempt from income tax. Assuming an average yield of 3% on an ISA (£4,000) this would be worth £54 to an additional rate tax payer 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 tax payer, £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.

5 ) 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.

6 ) How long will ISAs last?

ISAs are now a permanent feature of the savings landscape.

7 ) 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.

You need to be aware that the ceiling on investment in ISAs is applied to your total gross investment in a year. ISAs allow withdrawal with no loss of tax relief, but you can only re-invest later in the same tax year within your limits.

For example: You invest £4,100 in your cash ISA in May, then withdraw £1,000 in July. You then invest £1,000 in September. Although your 'capital' has risen by only £4,100 net, you have reached your £5,100 investment limit. Therefore, if you are concerned to invest the maximum amount in your ISA(s), you should not use the account to 'park' money temporarily.

8 ) Is there any risk associated with an investment in an ISA?

Yes - don't forget that the majority of funds capable of investment into ISAs 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.

If your holding is primarily deposit or savings accounts the risk is reduced.

9 ) How do I invest in an ISA? / 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.

Plummer Parsons