Individual Savings Accounts

Successive governments, concerned at the relatively low level of savings in the UK economy have over the years introduced various means by which individuals can save through a tax-free environment.

What is an ISA?

ISAs are tax-exempt savings accounts available to individuals aged 18 or over who are resident and ordinarily resident in the UK. ISAs are only available to individual investors and cannot be held jointly.

ISAs are guaranteed to run for ten years although there is no minimum period for which the accounts must be held.

Investment limits

The overall annual  savings limit is  £20,000 from 6 April 2017.

Investment choices

Investors are  allowed  to invest in  a  cash ISA, an  investment ISA, an Innovative Finance ISA,  or a  combination  of the three subject to not exceeding the overall annual  investment limit.

Investors are to transfer  their investments from a stocks and shares ISA to a cash ISA (or vice versa).

ISAs are allowed to invest in cash (including bank and building society accounts and designated National Savings), stocks and shares (including unit and investment trusts and government securities with at least five years to run) and life assurance.

A wide range of securities including  certain retail bonds with less than five years before maturity, Core Capital  Deferred Shares issued by building societies,  listed bonds  issued by Co-operative Societies and Community Benefit Societies and SME  securities that are admitted to trading on a recognised stock exchange  are eligible to be held  in a ISA, Junior ISA or Child Trust Fund (CTF).

A recent  introduction is the Innovative Finance ISA, for loans arranged via a  peer-to-peer (P2P) platform. Peer-to-peer  lending is a small but rapidly growing alternative source of finance for  individuals and businesses. The Innovative Finance ISA  may also invest in debt securities offered via crowdfunding platforms.

Withdraw  and replace monies

From 6  April 2016, ISA savers may be able to withdraw and replace  money from their cash ISA without it counting towards their annual ISA  subscription limit for that year  where  they hold a ‘Flexible ISA’.

Additional  ISA allowance for spouses on death

An  additional ISA allowance is available for spouses or civil  partners when an ISA saver dies. The additional ISA allowance  is  equal to the value of a deceased person’s  accounts  at the time of their death and  is in  addition to the normal ISA subscription limit. There are  time  limits  within which the additional allowance  has to  be used. In certain circumstances an individual  can transfer to their own ISA non-cash assets such as stocks and  shares previously held by their spouse.

In most cases it is  envisaged that the additional allowance will be used to subscribe to an ISA  offered by the same financial institution that provided the deceased person’s  ISA. As the new regulations allow the transfer of stocks and shares  directly into the new ISA, in many cases the effect will be that the  investments are left intact and the spouse becomes the new owner of the  deceased person’s ISA.

The tax advantaged treatment of ISAs  continue  whilst  an individual's  estate is in administration.

Tax advantages

The income from ISA investments is exempt from income tax.

Any capital gains made on investments held in an ISA are exempt from capital gains tax.

Uses of an ISA

Many people use an ISA in the first instance, to save for a rainy day. Since they were first introduced people have used them to save for retirement, to complement their pension plans or to save for future repayment of their mortgage to give just a few examples. We have known young people, wary of commitment to long-term saving start an ISA and when more certain of the future use it as a lump sum to start another financial plan.

Help to Buy ISA

The government has  introduced  the Help to Buy ISA, which  provides a tax free savings  account for first time buyers wishing to save for a home.

The scheme will provide a  government bonus to each person who has saved into a Help to Buy ISA at the  point they use their savings to purchase their first home. For every £200 a  first time buyer saves, the government will provide a £50 bonus up to a maximum  bonus of £3,000 on £12,000 of savings.

Help to Buy ISAs are  subject to eligibility rules and limits:

• An individual is only be  eligible for one account throughout the lifetime of the scheme and it is only  available to first time buyers.
• Interest received on the  account will be tax free.
• Savings are limited to  a monthly maximum of £200 with an opportunity to deposit an additional £1,000  when the account is first opened.
• The government will  provide a 25% bonus on the total amount saved including interest, capped at a  maximum of £3,000 which is tax free.
• The bonus will be paid  when the first home is purchased.
• The bonus can only be put  towards a first home located in the UK with a purchase value of £450,000 or  less in London and £250,000 or less in the rest of the UK.
• The government bonus can  be claimed at any time, subject to a minimum bonus amount of £400.
• The accounts are limited  to one per person rather than one per home so those buying together can both  receive a bonus.

Once an account is  opened there is no limit on how long an individual can save into it and no time  limit on when they can use their bonus.

Lifetime ISA

A new Lifetime ISA is available from 6 April 2017 for adults under the age of 40. Individuals will be  able to contribute up to £4,000 per year and receive a 25% bonus on the  contributions from the government. Funds, including the government bonus, can  be used to buy a first home at any time from 12 months after opening the  account, and can be withdrawn from age 60 completely tax-free.

Further details of the new  account are as follows:

• Any savings an individual  puts into the account before their 50th birthday will receive an added 25%  bonus from the government.
• There is no maximum  monthly contribution and up to £4,000 a year can be saved into a Lifetime ISA.
• The detailed rules are based on those for the Help to Buy ISA, in that the withdrawal must be for the purchase a property for the first time buyer to live in as their only residence and not buy-to-let. There are differences however. In particular, the bonuses within the Lifetime ISA can be used to fund the initial deposit on the home whereas the Help to Buy bonus can only fund the completion of the purchase.
• The savings and bonus can  be used towards a deposit on a first home worth up to £450,000 across the  country.
• Accounts are limited to  one per person rather than one per home, so two first time buyers can both  receive a bonus when buying together.
• Where an individual  already has a Help to Buy ISA they will be able to transfer those savings into  the Lifetime ISA in 2017, or continue saving into both. However only the bonus  from one account can be used to buy a house.
• Where the funds are  withdrawn at any time before the account holder is aged 60 they will lose the  government bonus (and any interest or growth on this) and will also have to pay  a 5% charge.
• After the account  holder’s 60th birthday they will be able to take all the savings tax-free.

Junior Individual Savings Account (Junior ISA)

Junior  ISAs are available for UK resident children under the age of 18 who  do not have a Child Trust Fund account. Junior ISAs are tax advantaged and have  many features in common with ISAs. They can be cash or stocks and shares based  products. The annual subscription limit for Junior ISA and Child Trust Fund  accounts  is  £4,128 for 2017/18 (£4,080 for 2016/17).

A transfer of savings from a CTF to a  Junior ISA  is permitted  at the request of the registered contact for the CTF.

How we can help

Please contact us if you would like any further information on ISAs.