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THE "ISA FAMILY"

There are now 5 different ISAs, so what was once a fairly simple savings arrangement has become far more complicated.

1) The ISA

 Most people know how these operate now of course, the attraction being tax efficient growth, income and proceeds. 

  • No personal liability to income tax or capital gains tax.
  • Investors in cash and bond-based ISAs will continue to earn interest tax free.
  • No tax on income generated or on capital gains within a Stocks & Shares ISA.
  • There is no need to report ISA investments on your tax return.

 The main changes that have occurred are:-

  •  The ISA limit from April 2017 is now £20,000, which can be invested in any mix of cash and stocks and shares.
  •  A surviving spouse/civil partner can now inherit the value of their deceased spouse/civil partner’s ISA accounts, which can be moved to any new ISA manager who will accept the subscriptions. The new allowance is available where the deceased died on or after 3 December 2014.
  •  Since April 2016, ISA savers can withdraw and replace money from their cash ISA in the same tax year without it counting towards their annual ISA subscription limit for that year. So Cash ISAs savers will be able to dip into their savings and replace them without it counting towards their annual subscription limits. The new contributions would have to be paid within the same tax year as the withdrawal for it not to be counted. These new flexible funding rules do not apply to stocks and shares ISA.

 2) The Junior ISA

These are tax free accounts for anyone under the age of 18, the maximum investment being £9,000 from April 2020. The Junior ISA remains tax free until age 18 when it is converted into an adult ISA.

 3) The Innovative Finance ISA

This was introduced from April 2016 for loans arranged via a peer to peer (P2P) platform. Also known as crowd-lending, peer to peer lending matches individual or company lenders to individual or company borrowers, effectively missing out banks in the chain.

The attraction is the higher rates that are available compared to bank or building society deposits, although they are of course much riskier. The platforms that offer this facility have their own safeguards in place to try to limit any losses, and indeed the sector has been regulated by the Financial Conduct Authority since 2014.  By April 2017, firms will have to have at least £50,000 worth of capital in reserves (more for bigger firms) to act as a buffer against difficulties or market shocks, but there is no savings safety guarantee. With normal UK savings, the Government-backed Financial Services Compensation Scheme safeguards the first £75,000 per person of savings if a bank goes bust, but this does not apply to peer to peer lending.

4) The Help To Buy ISA

This type of ISA is only available from banks and building societies and is designed for potential first-time buyers working hard to save up for their first home. It has been available since 1 December 2015.

Monthly contributions of up to £200 per month can be made (an initial deposit of £1,000 can be made when the account is opened). The maximum a customer can invest in this type of investment is £12,000. These will be eligible for a tax-free bonus from the Government of 25% up to a maximum Government contribution of £3,000. The bonus will only be calculated and paid when a first home is purchased located in the UK with a purchase value of £450,000 or less in London and £250,000 or less in all other parts of the UK.

Accounts are limited to one per person.  Individuals cannot contribute to both a Cash ISA and a new Help to Buy ISA at the same time. The account cannot be used where the property is being purchased as a buy-to-let.

This type of account will be available for a four-year period. Once opened there is no limit on the length of time the account can be held or the Government bonus claimed.

5) The Lifetime ISA (LISA)

A new Lifetime ISA is being introduced from April 2017, available to those under age 40, the brief details being:

  • Available from April 2017.
  • For investors aged 18 to 40 only.
  • Can contribute up to £4,000 per year.
  • Government bonus of 25% on savings made before age 50.
  • Savings and the Government bonus can be used to towards a deposit on a first home up to £450,000.
  • Proceeds are available after age 60 tax free for any purpose.
  • Proceeds can be accessed before age 60 for other than house purchase, but you will lose the Government bonus (and any interest or growth on this) and there will also be a 5% charge apart from in the first year.
  • Where an individual has a Help to Buy Isa, they will be able to transfer those savings to the Lifetime ISA, or continue saving into both, but only the bonus from one account can be used to buy a house.

Although a fairly simple product on its own, it lies within a complicated landscape: Help to Buy ISA or Lifetime ISA?, or perhaps more importantly, a Lifetime ISA or a Pension? The latter decision is quite complex, although certainly if you are a member of a workplace scheme with employer contributions then these are likely to be far more valuable than any bonus from the LISA.