Tax limits on Cash and Stocks and Shares ISAs explained

With the end of tax year 2016 looming, we take a look at tax limits on Investment Savings Accounts (ISAs) and explain why cash, and stocks and shares ISAs are not dead.

ISAs explained:

• Anyone in the UK aged 16 or older;
• Can save or invest up to £15,240 per tax year;
• Without paying tax on interest earned on their savings, or paying reduced tax rates on investments including Capital Gains tax;
• Once money or individual company shares are invested in an ISA they remain tax free, or tax-efficient.

Stocks and Shares ISAs and Cash ISAs explained:

• Cash ISAs are savings accounts that are tax free, there are two types of Cash ISAs – easy access where money can be withdrawn without attracting interest savings penalties and fixed ISAs where the money attracts a higher interest rate on savings but cannot be withdrawn.
• Interest on savings for top paying easy access ISAs have consistently out performed easy access savings accounts over the last four years.
• Stocks and shares ISAs provide investors with a way to invest individual company shares and money in a tax efficient way. The savings in the ISA can be invested in unit trusts, open-ended investment companies (Oeics), investment trusts, government bonds and corporate bonds where there is growth potential meaning that the value of the investments can go up. Though past performance of stocks and shares investments is not a guide to future performance. The way in which Stocks and Shares ISAs are charged (paid for) can vary investors should check rates with their IFA. Where investors pay higher or additional rate tax the advantages for tax-efficiency of Stocks and Shares ISAs is significant.
• Any capital gains made from investments in Stocks and Shares ISAs are tax-free. However, the UK annual capital gains allowance is £11,100 for the 2015/16 tax year; meaning that Stocks and Shares ISAs will only offer a capital gains tax benefit if the owner realizes a return in excess of the Capital Gains allowance in a single tax year.
• Investments in corporate bonds and gilts in Stocks and Shares ISAs, earn tax-free free interest, meaning a saving of 20% tax for a basic rate taxpayer, or 40% for a higher rate tax payer or 45% for an additional rate taxpayer.
• Investors are able to transfer a previous tax year Cash ISA into Stocks and Shares ISAs without affecting the current tax year’s ISA allowance.
• Investors can also transfer current tax year Cash ISAs into Stocks and Shares ISAs, provided the whole amount is transferred.
• Spouses can inherit their deceased spouses ISA allowance regardless of their own tax and personal savings allowances.

Tax year 2015-16 (ends 5 April 2016)

• For this tax year ‘without tax’ means that if your savings earn £100 in interest you will keep all of the £100 and
• If you haven’t yet taken advantage of a Cash or a Stocks and Shares ISA in this tax year, you still can up to the allowance of £15,240

Following on from our recent article about the London and Britain housing market we are also taking a close look at the new Help to Buy ISAs which were launched for first time buyers to help them save for a mortgage deposit. The Help to Buy ISAs differ from other ISAs because the government will add a 25% cash bonus on savings between £1,600 and £12,000 to help first time buyers save more.

Help to buy ISAs explained:

• First time buyer definition: A UK resident aged 16 or over who has never owned or had an interest in a residential property, either inside or outside of the UK, whether it was bought or inherited.
• First time buyers can save up to £1,200 in the first month, and then £200 per month after that.
• The £200 per month saving investment can be topped up if missed, but cannot equal more than £2,200 in the remaining 11 months.
• The State adds 25% tax free to whatever is in the ISA when you use it for a deposit. There are two exceptions to this: there must be a minimum of £1,600 in the ISA, and, the maximum the State would add would be £3,000 tax-free on a £12,000 ISA. If the ISA is worth more than £12,000 it can be kept as a savings account.
• The current scheme will pay out as described until December 2030.
• The accounts are individual, meaning that so long as every account holder qualifies as a first time buyer (see above) couples, or groups of first time buyers can lump savings together when the time comes to buy.
• It can be used for any UK residential property up to the valued of £250,000 (outside of London) or up to the value of £450,000 inside London.
• Unlike cash ISAs (which can be opened every tax year) Help to Buy ISAs are exclusive meaning that you may only have one.
• Though you cannot open a cash ISA in the same tax year that you open a Help to Buy ISA, you may have both types of savings accounts including stocks and shares ISAs so long as they were opened in a different tax year to the one in which the Help to Buy ISA was opened.
• You can take money out of the Help to Buy ISA if you are not buying a property at present and enjoy usual cash ISA benefits.
• It is worth transferring savings for a deposit into a Help to Buy ISA because of the State tax free allowance.
• You will have to ask your conveyancing solicitor to apply for the cash bonus when buying a property and transfer the funds from the Help to Buy ISA.
• Parents, guardians and carers can help their children to save for a mortgage deposit with a Help to Buy ISA, however, the child (age 16 years’ old or above) must open the account themselves and also qualify as a first time buyer.

We know that personal savings allowances, inheritance and capital gains tax, and other investments are subject to change come 5 April 2016.

For expert, friendly and considered advice about investments, please contact Marchwood IFA today.

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