12. Tax-free investments Flashcards
ISA - What are they? What are their key rules?
Types & Limits: Various ISA categories; total contributions across all ISAs must not exceed the annual limit. (£20,000 culmulative across types, £4,000 for LISA)
From April 2024: You can invest in ISAs from different providers in each category, within the annual limit.
Eligibility: Available to UK residents aged 18+ (cash ISAs available from age 16 until 5 April 2024).
Individual Accounts: ISAs are personal; cannot be joint or taken out for someone else (except Junior ISAs).
Junior ISAs: Opened by a parent for children under 18; anyone can contribute.
Tax-Free Interest: Interest is tax-free, and withdrawals do not affect the ISA’s tax-free status.
Withdrawals: Can be made anytime; no statutory lock-in, but some providers may set minimum periods.
**Non-Resident: **If you move abroad, you can’t contribute further, but existing ISAs remain tax-free.
Flexible ISAs - What are they?
Flexible ISA:
A flexible ISA allows withdrawn cash to be replaced within the same tax year without affecting the annual ISA allowance. Only cash can be replaced, including dividends or interest held as cash.
Which ISA types can not be flexible ISAs?
- Junior ISAs
- Help to Buy ISAs
- Lifetime ISAs
Rules of flexible ISAs
- Providers must track subscriptions and withdrawals to show net contributions per year.
- Withdrawn cash must be replaced within the same tax year; it can’t be carried forward.
- Cash from previous years’ investments can be replaced without affecting the current year’s allowance.
- Replaced funds must go into the same ISA account; if closed, a new account with the same provider can be opened.
- Full transfers to another provider lose the ability to replace previous withdrawals; partial transfers retain it.
- Withdrawals are first applied to the current year’s subscriptions, then previous years’.
- Reinvested funds first replenish previous years’ amounts, then current year contributions.
- Withdrawals from the current year’s ISA can be replaced in a different ISA of the same type.
- Unused annual allowances cannot be taken up through reinvestment.
- Interest and dividends paid out as cash can be replaced within the flexible ISA.
Can life insurance policies be held in S&S ISAs?
Yes, but they are rare. Eligible life insurance policies must:
- Be in the ISA holder’s single name.
- Terminate when no longer in the ISA.
- Not be assigned or transferred to the investor’s name.
- Include life cover of at least 1% of the policy’s value.
- Have no obligation for future premiums, though regular contributions are allowed.
- Allow benefits like critical illness cover without policy termination.
These policies are typically with-profits and structured like investment bonds.
What is an innovative finance ISA?
An IFISA allows investment in peer-to-peer (P2P) lending platforms and crowdfunding (e.g., retail bonds, debentures). Key rules:
- Part of the overall ISA allowance.
- Free from tax on capital and interest payments.
- ISA manager must handle payments from borrowers.
- Investments must be on commercial terms.
- Investor must be 18+.
- Crowdfunding with existing tax benefits isn’t eligible.
“what is an help to buy ISA”
The HTB ISA (available from Dec 2015 to Nov 2019) helps first-time buyers save for a deposit with a government bonus. Key rules:
- Existing holders can fund until 30 Nov 2029.
- 25% government bonus, max £3,000, on savings including interest (minimum £400 bonus requires £1,600 saved).
- Property price limits: £450,000 in London, £250,000 elsewhere.
- Max deposit: £200/month, £1,000 initial deposit.
- Bonus paid upon property completion by 1 Dec 2030.
- Interest and bonus are tax-free.
- No bonus if no property purchase (but still retain interest)
What is a LISA?
A LISA helps save for **retirement **or a first home. Key rules:
- Available to UK residents aged 18-39; contributions allowed until the day before turning 50.
- Max £4,000/year contribution, part of overall ISA allowance, can be invested in stocks and shares.
- 25% government bonus on contributions, up to £1,000/year, credited monthly.
- Funds accessible at age 60 for any reason, or earlier for first home purchase or serious illness, without penalty.
- Property must be a first home in the UK worth up to £450,000.
- 25% penalty on toatal fund value withdrawn before age 60 for other reasons.
- Help to Buy ISA can be transferred into a LISA, but only one bonus can be used for property purchase.
Taxation rules of ISAs
Taxation of ISAs - Key Points:
- Interest: Paid gross and not taxable.
- Bonds in Equity ISA: Interest is tax-free; any deducted tax can be reclaimed.
- Dividends: No income tax on dividends from shares or equity-based investments in an ISA.
- Bond-Heavy Funds: If 60%+ of a unit trust/OEIC in an ISA is invested in bonds, cash, or money-market instruments, interest is tax-free.
- REIT Distributions: Paid gross with no income tax liability.
- Capital Gains Tax (CGT): No CGT on gains, but losses cannot offset gains.
- Life Assurance ISA: Gains are not taxable; the fund grows tax-free.
What is the additional permitted subsription and when does it apply?
The Additional Permitted Subscription (APS) applies when an ISA holder dies, allowing the surviving spouse or civil partner to receive an increased ISA allowance.
- Tax-exempt status: ISA retains tax exemption until estate administration is completed, the ISA is closed, or three years from death—whichever is earliest. During this period, it’s called a “continuing ISA.”
- APS: Surviving spouse or civil partner receives an additional ISA allowance equal to the deceased’s ISA value.
- Options: Spouse can inherit the ISA and keep it tax-free, or invest additional amounts in their own ISA using the APS.
- APS calculation: Based on the higher of the ISA’s value at death or when the tax-exempt status ended.
- Non-spouse/civil partner beneficiaries: Can inherit the underlying investments but do not receive the APS.
- AIM shares: Continue to qualify for Inheritance Tax Business Property Relief if held for two years.
What is a ‘continuing ISA’?
A continuing ISA is an Individual Savings Account that retains its tax-exempt status for the period following the account holder’s death, lasting until the estate administration is completed, the ISA is closed, or three years from the date of death—whichever occurs first.
Typical types of charges and values for ISAs?
- Charges on Collective Investments in ISAs: Generally, no additional charges beyond those for the unit trust/OEIC/investment trust.
- Administrative Charges: Some ISA managers may impose their own administrative charges.
- Self-Select or Share ISAs: Typically incur an annual management charge.
- Management Charge Rates: Usually range from 0.5% to 1.5% of the fund value
Key information regarding ISA transfers
- Transfers Allowed: ISA managers must allow transfers out of cash or stocks and shares ISAs; innovative finance ISA managers set their own withdrawal and transfer terms.
- Transfer Process: Transfers must be made from manager to manager; if funds are paid to the investor, they lose ISA status and are treated as a new ISA on reinvestment.
- Partial Transfers: Investors can transfer all or part of an ISA and switch between different ISA categories.
- Impact on Contribution Limits: Transfers from previous years’ ISAs do not affect the current year’s contribution limit. From 6 April 2024, transfers can be made regardless of the tax year of the contributions.
- Current Year Transfers: If a transfer occurs in the year contributions were made, it counts towards that year’s allowance.
- In-Specie Transfers: Assets can be transferred without sale (in specie) or sold within the ISA, with cash transferred to the new manager.
- Child Trust Fund: Proceeds from a maturing Child Trust Fund can be transferred to an ISA without impacting the annual allowance.
Using ISAs - points on using them for income or for growth
Investing for Income:
- Better for shorter-term: tax-free income, especially beneficial for higher-rate taxpayers.
- Income-focused investors typically won’t exceed the annual CGT allowance.
- S&S ISAs may offer attractive yields compared to low-interest deposit accounts.
- S&S ISAs provide the potential for rising income via capital growth.
- Risk: Volatility of equities could lead to capital loss, unlike deposit accounts which protect capital.
Investing for Growth:
- Best suited for medium to long-term goals, such as building a capital sum.
- CGT exemption is valuable for wealthy investors who exceed the annual CGT allowance.
- Stocks&Shares ISAs can experience drops in value, reflecting the inherent risk of equity-based investments.
What is a Child trust fund - what is the current contribution limit? (2024/2025)
- Launched in April 2005 to encourage tax-free savings for children.
- Eligible for children born between 1st September 2002 and 31st December 2010.
- Initially funded by a £250 government contribution, but** no new government payments or accounts can be started.**
- Replaced by Junior ISAs, but existing CTFs can still be contributed to by parents, family, and friends.
Key Features:
* Belongs to the child, with sole access at age 18.
* Tax-free growth (no income or capital gains tax).
* Three types: savings (deposit), equity-based (e.g., unit trusts), and stakeholder accounts.
* Can be transferred to a Junior ISA or an ISA at 18 without affecting the annual ISA allowance.
* 2024/2025 Contribution Limit = £9,000
