Increase in Individual Savings Accounts (ISA) limits
From 6 April 2017, the annual ISA allowance will increase from £15,240 to £20,000.
Introduction Individual Savings Accounts (ISAs) are tax-free funds in which UK residents can hold a range of different investments. Originally, these were cash or stocks and shares products held by those over 16 years of age. However, in November 2011 the junior ISA was launched which allows tax-free cash accounts to be set up for the benefit of those under 16.
The main benefits of ISAs are:
no tax on income or gains within the ISA
no tax on capital gains arising on the encashment of an ISA
no minimum holding period: withdrawals can be made at any time.
There are three types of ISA:
stocks and shares ISA (previously known as a maxi ISA)
cash ISA (previously known as a mini ISA)
Who can invest in an ISA? To make an investment in an ISA, the qualifying individual must be:
resident in the UK
16 or over for a cash ISA
18 or over for a stocks and shares ISA
a Crown servant (eg diplomatic or overseas civil service) or their spouse or civil partner.
If an individual moves abroad and becomes non-resident, he can keep his ISA(s) and retain the tax benefits, but no contributions can be made during the period of non-residence.
Cash ISAs can include:
savings in bank and building society accounts
some National Savings and Investments products
Stocks and shares ISAs can include:
shares in companies
unit trusts and investment funds
Innovative finance ISAs can include peer-to-peer loans, which are loans given to other people or businesses without using a bank.
You cannot transfer any peer-to-peer loans already made into an innovative finance ISA.
Repayment of funds in same tax year From 6 April 2016, individuals are able to withdraw funds from their ISA and subsequently replace the money without it counting towards their annual ISA subscription limit, and while retaining the tax-free status of the account. However, the funds must be replaced in the same tax year as they were withdrawn.
Help to buy ISAs ‘Help to buy’ ISAs were introduced in 2015 to help first-time buyers to save for a deposit on a home in the UK. They are only available to individuals who are 16 years of age and over.
The individual must open the account with an initial deposit of up to £1,000. There is no minimum monthly deposit, but a person can save up to £200 a month. Accounts are limited to one per person rather than one per home – so those buying together can both receive a bonus.
The bonus is available to first time buyers purchasing UK properties. The minimum bonus size per person is £400 and the maximum bonus size is £3,000. The bonus will be available on home purchases of up to £450,000 in London and up to £250,000 outside London.
Junior ISAs Junior ISAs, introduced in November 2011, were designed to be an alternative to the child trust fund but without the government contribution to the fund. Junior ISAs are available to a child living in the UK, who is under 18 years of age and does not have a child trust fund account.
As with adult ISAs, there are two types of junior ISA accounts: cash ISAs and stocks and shares ISAs. Junior ISAs funds are owned by the child and are locked in until the child reaches 18 years of age. The child is able to hold only one junior cash ISA account and one junior stocks and shares ISA account at any one time (although transfers between accounts are possible).
All income and gains within the account(s) are tax-free and losses will not be allowable for tax purposes. Annual contributions are capped, with the 2017/18 junior ISA allowance being £4,128.
As the income from the junior ISA account is not taxable, the current anti-avoidance mechanism of assessing the income (once it exceeds £100) on the parent would not produce a tax liability. This means that a parent can fund their child's junior ISA as well as their own ISA without attracting a tax liability on the interest / gains. This makes the junior ISA an excellent way of providing for the child's future in a tax efficient way.
There are two instances where withdrawals are possible before the child reaches 18 years old. These are where the child is terminally ill, or upon death.
Legal title to all of the investments passes to the child on their 18th birthday and the account ceases to be a junior ISA. The most likely outcome is that the investments will be rolled into an adult ISA. This may require the 18 year old to complete an application to open an adult ISA.
Giving investment advice The usual health warning applies here: You cannot give investment advice unless you are authorised to do so by the Financial Services Authority. You can tell your client about tax efficient investments, but you must not recommend any based on their circumstances.