Individual Savings Accounts (ISAs)

An ISA is a tax-free investment vehicle. When you invest your savings, shares or life insurance, as well as all FSA 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.

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?

ISAs have an annual subscription limit of £7,200, of which no more than £3,600 can go into a cash ISA.

16-17 year olds can invest up to £3,600 into a cash 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.

ISA's 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 £7,200 overall, of which no more than £3,600 can be in 'cash' (e.g. national savings). Invest smaller amounts in cash and the difference, up to the overall ceiling of £7,200, can be in stocks and shares.

So, for example, you could invest:

The £7,200 limit on investments is split between two separate types of ISA:

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 4% on an ISA (£4,000) this would be worth £64 p.a. to a higher rate taxpayer and £32 to a basic rate taxpayer, i.e. not much!

Gains made on investments held in ISAs are exempt from capital gains 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 £2,600 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 £2,600 net, you have reached your £3,600 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 Services Authority (FSA) 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. As with PEPs you can choose to have a different manager each year.