ISAs

What is an ISA? - New rules for 2008 onwards

  A number of important changes to the ISA regime came into effect on 6 April 2008. These changes were designed to present ISAs in a simpler and more flexible way for investors. The limits detailed in this document are correct for the tax years 2008/9 and 2009/10.

Summary of the changes
• ISA investors may invest in up to two separate ISAs each year: a Cash ISA and a Stocks & Shares ISA.
• The annual ISA allowance increased to £7200.
• The entire £7,200 can be invested in a Stocks & Shares ISA with one provider.
• Up to £3,600 of the allowance can be invested in a Cash ISA with one provider whilst the remainder can be invested in a Stocks & Shares ISA.
• All previous PEP investments reclassified as Stocks & Shares ISAs.
• All previous TESSA Only ISAs (TOISA) reclassified as Cash ISAs.  
• Cash ISAs can now be transferred to a Stocks & Shares ISA.
• ISAs will remain available indefinitely.

What is an ISA?
Any individual who is an income tax payer and has some money to save or invest, should know about Individual Savings Accounts (ISAs). Available since April 1999, ISAs offer an attractive tax-efficient investment to anyone aged 18 or over (16 or over for cash ISAs).
With bank and building society savings accounts taxpayers normally have to pay tax on any interest earned on their capital. The tax is deducted from the interest before it is paid, reducing the amount received. Similarly, tax must be paid on the income and profits made from investments in the stockmarket, whether made directly or through unit trusts and OEICs.

ISAs, however, serve as a kind of 'wrapper' to protect savings from tax, allowing individuals to invest a maximum of £7,200 (by way of regular or single contributions) each tax year in a range of tax efficient savings and investments and pay no personal tax at all on the income and/or profits received, however it is not possible for ISA managers to recover tax deducted at source from UK dividend income.

The main ISA benefits are:
• No personal tax (income or capital gains) on any investments in an ISA.
• Income and capital gains do not need to be included in tax returns.
• Money can be withdrawn at any time without losing the tax breaks.

The basics of how ISAs work
There are now just two types of ISA from April 6th 2008 (Cash and Stocks & Shares) which may contain one or more of the following components:
• Stocks & shares, in the form of either individual shares or bonds, or pooled investments such as open-ended investment funds, investment trusts or life assurance investments.
• Cash, usually via a bank or building society savings account, or a money market fund.

Cash ISA
You can have one Cash ISA up to the limit of £3,600 with one provider each tax year, with the option of investing the remaining allowance of £3,600 into a Stocks & Shares ISA.
Under the new rules you can transfer some or all of the value of your Cash ISAs from previous years into Stocks & Shares ISAs without affecting your annual ISA investment allowance.
Cash ISAs effected after 6th April 2008 may also be transferred into Stocks & Shares ISAs, but if the transfer occurs in the same tax year as the Cash ISA was taken out, it will count toward your ISA allowance for that year.

Stocks & Shares ISA
With a Stocks & Shares ISA you can invest the full £7,200 with one provider. The Stocks & Shares ISA must include a stocks & shares element.

How to hold ISAs
ISAs were traditionally held direct with the fund managers who also administered the plans and so only allowed you to hold their funds in your ISA. This made it difficult to monitor and manage your ISAs if you had diversified between several fund managers. A recent and increasingly popular way of holding ISAs is in fund supermarkets. This is because fund supermarkets afford more convenience and choice when it comes to monitoring and managing your ISAs. You can hold funds from different fund managers in the same ISA and economies of scale mean you can save money.
Existing ISAs may be transferred, or in many cases can be re-registered to a fund supermarket. Note, advice should be sought as a few ISA managers levy exit fees, though these are typically no more than £25. 
 
Qualifying Investors
To be eligible to invest in an ISA, an investor must be an individual (i.e. not a company or trustee) who is 18 years of age or over (16 years of age and over to invest up to £3,600 in a cash ISA), and who is resident and ordinarily resident in the UK (or is a Crown servant serving overseas or the spouse of such an individual who accompanies their spouse abroad).

When an individual ceases to be eligible to invest in an ISA, any existing ISAs will continue to be exempt from UK tax, but future contributions to regular investment ISAs must be terminated and no further single contributions may be made.

Each individual may invest up to the ISA allowance each tax year. A husband and wife are treated as separate individuals so that although joint ownership of an ISA is prohibited each may fully subscribe to one in their own name.