The 5 April deadline is fast approaching for any unused contributions that you may wish to make to your 2006/07 Individual Savings Account (ISA) allowance. Follow our ISA refresher if you need a reminder about what they are and how they could work for you.
What is an ISA?
An ISA is a tax-efficient means by which investors may save and invest without incurring income or capital gains taxes on the proceeds. An ISA is not an investment in itself, it is an investment wrapper.
What can I invest inside my ISA wrapper?
You may invest in a combination of the following types of asset: cash deposits, stocks and shares and life assurance investments.
Cash deposits: Qualifying investments include bank and building society deposits, and money market unit trusts. Some National Savings products are also included, as well as a range of existing bonds and accounts on which tax is normally payable.
Stocks and Shares: The equity element in an ISA may include any authorised unit or investment trust or open ended investment company (OEIC), as well as any share quoted on a stock exchange recognised by HM Revenue & Customs.
You are also allowed to include direct holdings of gilts, bought with at least five years to go to maturity. There are no global investment restrictions. So, you could invest your full annual allowance in a fund that invests in the US, Europe or global technology stocks.
Life assurance: Investments such as with-profits bonds and unit-linked life insurance funds are eligible. Until 5 April 2005, these life assurance products were treated as a separate ISA element. Since then, depending on the product, they form part of either the cash or the stocks and shares element of your ISA.
What are the tax benefits?
An ISA allows you to invest up to £7,000 on a tax-efficient basis each year. There is no tax relief on money put into ISAs on entry, unlike contributions to a pension scheme. Instead, you are not liable to pay income or capital gains tax on the proceeds of an ISA and the investments you hold within an ISA grow free of income and capital gains tax.
However, as a result of changes to the taxation of company earnings, stocks and shares ISA and Personal Equity Plan (PEP) investment managers may no longer reclaim the 10% tax credit on dividend income. There is an income tax incentive for higher rate taxpayers, who have no further income tax liability on dividends received on ISA investments. Interest from deposits and from corporate bonds attracts a 20% tax credit. Stocks and shares investments held within ISAs are not liable for capital gains tax.
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What are the ISA investment rules?
There are two types of ISA: Maxi ISAs and Mini ISAs, on top of which you can split your £7,000 annual ISA allowance across two investment elements: cash and stocks and shares (both of which may also contain a life assurance element, depending on how HM Revenue & Customs classify the particular policy).
A Maxi ISA (up to £7,000 per tax year) allows you to invest in both elements of an ISA. However, there is a limit of £3,000 for the cash element. The stocks and shares element may make up the remainder of the allowance or may take up the entire allowance, in which case you must forego investing in the cash element. You are only allowed to use one company to provide your Maxi ISA in any tax year.
A Mini ISA (limit of £3,000 per tax year in cash or £4,000 per tax year in stocks and shares) allows you to invest in either of the investment elements and with more than one company. So you could have a cash Mini ISA with your building society and a stocks and shares Mini ISA with a fund manager. However, in the Chancellors 10th Pre-Budget Report he announced the possible future scrapping of the distinction between cash Mini-ISAs and stocks and shares ISAs, enabling investors to spread their money as they wished as long as the £7,000 limit was not exceeded. No date for the reforms was given and implementation is subject to consultation.
The Maxi ISA investment is more flexible, because any part of your annual allowance for investment in the cash element that is not used up may be invested in the stocks and shares element. However, it does not work the other way around, so you can't go above £3,000 in the cash element if you do not want to invest in the stocks and shares element.
Can I transfer my ISA to another provider?
You may transfer your ISA to another ISA manager. You can usually transfer simply by asking the new ISA manager to arrange the transfer. Your existing ISA manager cannot stop you transferring, but they may make you pay a charge, or insist that you sell any existing ISA investments and transfer cash.
You may transfer all of the money you put into your ISA in earlier years or only some of it, if you wish. However, some managers may not allow you to transfer part of your ISA (this will be in the Terms and Conditions).
If you would like to beat the deadline and review your ISA options, please email or contact us for further information. |
