Individual Savings Accounts (“ISA”) Print
ISAs are tax-exempt savings plans.
There are currently 4 types of ISA:
- Cash ISA
- Stocks and shares ISA
- Innovative finance ISA
- Lifetime ISA
For 2020/21 and 2021/22 the maximum annual investment is £20,000 There is no restriction to the amount that may be paid into a cash ISA.
There is no upper limit to the amount that may be accumulated within an ISA.
No minimum investment limit has been set, and there is no limit on the period during which an ISA may be held. Only individuals who are aged over 18, who are resident in the UK, are eligible to hold ISA accounts, although individuals aged over 16 are able to hold a cash ISA only.
Shares acquired under approved profit sharing, or SAYE schemes may be transferred into an ISA at market value, with no CGT liability on the transfer. However, shares issued on demutualisation or under public offer are not eligible to be transferred into an ISA.
Qualifying investments in an ISA enjoy exemption from both income tax and CGT.
Where an ISA saver dies, that individual’s spouse or civil partner will be entitled to an additional ISA allowance equal to the value of the saver’s ISAs. This will enable the transfer of the ISA funds of the deceased into the survivor’s ISAs where the income and gains of those funds will remain tax exempt.
A temporary withdrawal may be made from an ISA, and provided the money is replaced within the same tax year the repayment does not count towards the individual’s ISA subscription for that year.
The Lifetime ISA (“LISA”) has been available for individuals aged between 18 and under 40 since April 2017. The maximum savings allowed are £4,000 per year. It is anticipated that LISAs will supersede Help to Buy ISAs and an individual who has a Help to Buy ISA may transfer those savings into a LISA, although he may continue saving into both. However, the saver will only be able to use the bonus from either the Help to Buy ISA or the Lifetime ISA to buy a home.
Where savings continue via a Help to Buy ISA provided the funds are used to buy the individual’s first home, the government will pay a bonus of 25% of the value of the Help to Buy ISA provided the savings exceed £1,600. Where the savings are less than £1,600, no bonus will be paid. The maximum bonus under a Help to Buy ISA is £3,000 where savings exceed £12,000.
LISAs are available to individuals who are aged 18 to 39, and once the account has been opened contributions can be made until the individual is 50. The maximum annual contribution into a LISA is £4,000 and counts towards the annual ISA limit of £20,000.
A 25% charge applies if cash or assets are withdrawn from a LISA unless:
- The withdrawal is used to buy the investor’s first home, provided:
- the property costs less than £450,000;
- The property is purchased at least 12 months after the lifetime ISA has been opened;
- A conveyancer or solicitor is used for the purchase – the ISA provider will pay the funds directly to them;
- The property is being purchased with a mortgage;
- The investor is aged 60 or over, or
The investor is terminally ill with less than 12 months to live.
For LISAs, the government will pay an annual bonus of 25% of the savings, subject to a maximum bonus of £1,000 per year.
Funds may be withdrawn at any time before the saver turns 60, but the government bonus will be lost on the amounts withdrawn, and in addition there will be a 25% charge on withdrawal.
Innovative Finance ISAs were introduced from 6 April 2016 to encourage peer-to-peer (“P2P”) lending. Individuals are able to make cash subscriptions into an innovative finance account operated by a P2P lending platform. The attraction is that the rate of return should be considerably higher than that achieved via a cash ISA, but this must be coupled to the risk factor that the borrower may default, and that part of the investment in the ISA will as a result, be lost, and must be regarded as a higher risk investment. As for any other form of ISA any income or gains generated by the investment are exempt from both income tax and CGT. Conversely, any losses generated will not be available for offset against either income, or gains.