Individual Savings Accounts – ISAs
What are Individual Savings Accounts?
Individual Savings Accounts are tax efficient
savings schemes. They were launched in 1999 for an initial 10 year
period as the successor to Personal Equity Plans and Tax Exempt Special
Savings Accounts. An ISA is not an investment itself but
rather the regulatory and tax concession framework that applies to eligible
investments.
Since 6th April 2008, ISAs have been available
indefinitely. There is no set end date for ISAs
Who can have an ISA?
The opportunity to use an ISA to protect investments from
taxation is open to any UK resident over the age of 18. Those under age
18 but over age 16 can invest in a Cash ISA.
Structure
and Limits (tax year 2010/11)
The ISA allowance
for all qualifying individuals is £10,200
Up to 50% of the allowance can
be saved in cash with one provider. The remainder can be invested in stocks and
shares with either the same or another provider.
Savers are able to transfer
some or all of the money saved in previous tax years from cash ISAs to stocks
and shares ISAs without affecting their annual ISA investment allowance.
Savers are also able to
transfer money saved in the current tax year in cash ISAs to stocks and shares
ISAs. Such transfers must be the whole amount saved in that tax year in that
cash ISA up to the day of the transfer.
Once money saved in the
current tax year is transferred from a cash ISA to a stocks and shares ISA, it
is treated as if it had been invested directly into a stocks and shares ISA in
that tax year. The saver is able then to still save up to the full remaining
balance of their £10,200 annual ISA investment allowance in ISAs in that tax
year, including up to £5,100 in a cash ISA.
What are the benefits?
Investments sheltered within an ISA are free from
personal taxation, although dividends from UK Equities no longer receive a 10%
tax credit within the ISA. There is no Income Tax liability on
withdrawals from your ISA. All gains from any investments sold
within an ISA are free of Capital Gains Tax. You do not have to
declare your ISA on your tax form.
What are the risks?
There are no inherent risks per se with an ISA – the risk
lies within the underlying investment that has been sheltered from taxation by
the ISA wrapper.