CEMAP 1 Topic 9- Tax Wrappers Flashcards
Individual savings accounts (ISAs)
The government introduced from 6 April 1999, the individual savings account (ISA). Its stated objectives were to develop the savings habit
and to ensure that tax relief on savings is fairly distributed.
Types of ISA:
A stocks and shares ISA can include:
— shares and corporate bonds
— gilt‑edged securities and similar stocks issued
by governments of countries in the EEA;
— UK‑authorised unit trusts and OEICs;
— UK‑listed investment trusts;
— life assurance policies on the sole life of the
ISA investor;
— units in a stakeholder medium‑term
investment product;
— shares acquired in the previous 90 days from
an all‑employee savings‑related share option
scheme (SAYE).
A cash ISA can include:
— bank and building society deposit accounts;
— units or shares in UK‑authorised unit trusts
and OEICs that are money‑market schemes;
— stakeholder cash deposit products.
An innovative finance ISA involves investing via a peer‑to‑peer (P2P) lender
A Help‑to‑Buy ISA was to help those saving for their first UK home by adding a bonus to any savings they make.
A Lifetime ISA can be used to buy a first home (replacing the Help‑to‑Buy ISA) or save for later life
ELIGIBILITY RULES FOR ISAS
- The minimum age for investing in a stocks and shares, innovative finance ISA or Lifetime ISA is 18 years (Lifetime ISAs also have a maximum age of 40); a cash ISA can be opened by anyone aged 16 or over.
- An ISA investor must be generally resident in the UK for tax purposes.
- An ISA can only be held in a single name, ie joint accounts are not permitted.
Subscription Limits:
There are limits on the maximum amount that may be saved each tax year.
Provided the overall annual subscription limit is not exceeded, an individual investor can choose to invest the full annual amount into a stocks and shares ISA, or a cash ISA or an innovative finance ISA, or split their investment in any
proportion they wish.
Withdrawals and Transfers:
ISA providers have the option to offer flexibility, allowing funds withdrawn from a cash or innovative finance ISA, or the cash element of a stocks and shares ISA, to be replenished during a tax year. However, providers are not obliged to offer this flexibility.
Many ISA providers allow no‑notice withdrawals to be made, although there are some fixed‑rate cash ISAs that do not permit withdrawals during the fixed‑rate period.
Funds may be transferred between different types of ISA without contravening the ISA limits. ISAs can be transferred between providers.
Tax Reliefs
Investors are exempt from income tax and CGT on their ISA investments.
Help-to-Buy ISA
The Help‑to‑Buy ISA is a cash ISA that was available from 1 December 2015 until 30 November 2019. Designed to help those saving for their first UK home by adding a bonus to savings. Anyone who opened an account by 30 November 2019 will be able to use the funds invested and the bonus payment towards the purchase of a first home by 1 December 2030.
Account holders could make an initial deposit of up to £1,200. Monthly savings of between £1 and £200 can be made until 30 November 2029.
Each £200 paid in attracts a bonus payment of £50, subject to the ISA being worth at least
£1,600 when funds are withdrawn for home purchase. The minimum bonus size is £400 and the maximum £3,000. The bonus is available on purchases of up to £450,000 in London and £250,000 elsewhere in the UK and is paid when
the home purchase is completed.
Savings into a Help‑to‑Buy ISA form part of the annual ISA allowance, rather than being in addition to it.
Lifetime ISA
A Lifetime ISA was introduced from 6 April 2017, with the aim of encouraging younger people to save for their first home in the UK, to a value of up to £450,000, and/or for their retirement.
The main rules are as follows:
- A Lifetime ISA can be opened by those aged between 18 and 40.
- Savings made before the age of 50 attract a bonus of 25 per cent (paid by the government).
- In 2017/18, the bonus was paid annually but since 6 April 2018 it is paid monthly, which enables interest to be earned on the bonus.
- A maximum of £4,000 may be saved per tax year; there is no monthly savings limit.
- The underlying investment choices are the same as those in the cash and stocks and shares ISAs.
- Savings into a Lifetime ISA form part of the annual ISA allowance, rather than being in addition to it.
- Savings can be used to purchase a first home and/or retained to provide benefits in retirement from the age of 60.
- Savings, including the bonus, can also be withdrawn when the accountholder is terminally ill.
- A 25 per cent penalty is applied if funds are withdrawn for reasons other than the purchase of a first home, the holder reaching age 60 or the holder suffering a terminal illness.
- An individual may contribute to both a
Help‑to‑Buy ISA and a Lifetime ISA, but the bonus payment from only one of these ISAs can be used towards the purchase of a first home
Child Trust Fund (CTF)
The Child Trust Fund (CTF), a tax‑free savings account for children, was introduced in 2005 to encourage savings on behalf of children, and was available to children born on or after 1 September 2002. When Child Trust Funds were introduced, the intention was that the government would make contributions to them; however, government contributions ceased in 2011.
CTFs are no longer available to new savers, although existing CTFs can be retained as a vehicle for family and friends to save for a child. Alternatively, a CTF may be transferred into a Junior ISA.
A summary of the main characteristics of the Child Trust Fund is as follows.
- At the time the CTF was introduced, each individual CTF began with an initial payment provided by the government in the form of a voucher, sent automatically to the Child Benefit claimant. If the child’s family was eligible for the full Child Tax Credit, the initial payment was £500; for others, it was £250.
- The government payment was reduced to £50 for children born on or after 1 August 2010 (or to £100 for those in families eligible for full Child Tax Credit). Government payments were withdrawn altogether on 1 January 2011.
- The parent or carer used the voucher to open a CTF account.
- The account remains in force until the child’s 18th birthday, at which point the child has access to the money in the account and can use it for any purpose they wish. There is no access to money in the account before the child’s 18th birthday.
- The child’s parents remain responsible for the CTF until the child is 16, after which the child can manage their own account.
Types of CTF:
There are three general types of CTF:
- Deposit‑type savings accounts, which are bank and building society accounts that offer fixed or variable rates of interest;
- Share accounts that can hold a range of investments similar to those available in a stocks and shares ISA;
- Stakeholder CTF accounts.
Stakeholder CTF accounts invest in a range of company shares, subject to certain government rules designed to reduce the risk. Originally, from the child’s 13th birthday, the money had to be gradually moved to lower‑risk assets to protect it from stock market losses closer to the child’s 18th birthday. This restriction no longer applies.
The maximum annual charge permitted on a stakeholder CTF is 1.5 per cent. There is no limit on charges on other types of CTF.
Subscription limits and taxation
Parents (and other family members or friends) can make additional investments into a CTF, up to an annual maximum. The subscription year for CTFs is slightly different from that for ISAs, as it runs from the child’s birthday to the
day preceding their next birthday. As with ISAs, there is no tax on income or capital gains from the CTF
Junior ISAs
Junior ISAs (JISAs) became available in November 2011 when the Child Trust Fund (CTF) scheme closed.
Children cannot have both a JISA and a CTF, but CTFs can be transferred into JISAs on request.
JISAs confer the same tax benefits as an adult ISA. Stocks and shares and cash JISAs are available, and investment can be made into one type or split between each. As with other
ISAs and CTFs, there is a maximum annual investment limit.
Where a child is aged under 16, a JISA can only be opened and managed by the child’s parent (or another adult with legal responsibility for the child).
An eligible child aged 16 or over can open and manage a JISA on their own behalf; if a JISA has already been opened for them, they become responsible for managing it.
Funds cannot be accessed until the child reaches 18; once the child is 18, the
account becomes a conventional adult ISA
Venture Capital Trusts and the Enterprise
Investment Scheme
Newly established companies can find it difficult to raise the funds they need to grow. To encourage private investors to provide funds to such companies, the government offers various schemes that incentivise investment through the award of tax benefits. The two main types of scheme are Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS).
The main difference between the two types of scheme is that a VCT is an investment in its own right, a collective investment, whereas the EIS is a system of tax reliefs that an individual company applies for; if a company is eligible
for the EIS an investor in the company can claim the available tax reliefs.
Venture Capital Trusts
A Venture Capital Trust (VCT) is a company whose shares are listed (and can therefore be traded) on the stock exchange; it is run by an investment manager.
The VCT normally spreads the monies raised from investors over a range of different companies.
Investment into a VCT is normally viewed as high risk, so income tax reliefs are granted to make the proposition more attractive:
- Income tax relief at up to 30 per cent is given on an investment of up to £200,000 per tax year.
- Any dividends paid by the VCT from the £200,000 permitted maximum investment are tax free.
- Any capital gains are exempt from CGT.
- A VCT must be approved by HMRC and must meet certain conditions to gain approval
Enterprise Investment Scheme
In a similar way to a VCT, the Enterprise Investment Scheme (EIS) is designed to encourage investment in certain smaller, high risk companies by the provision of tax relief. The main difference is that whereas a VCT is a listed company that undertakes the investment on the behalf of the investor, the EIS involves direct investment in a company that is eligible for the scheme.
As with VCTs, EIS investment is seen as high‑risk so tax reliefs are offered:
- Income tax relief at up to 30% is given on an investment of up to £1,000,000 (£2,000,000 if the amount invested in excess of £1,000,000 is made in knowledge‑intensive companies) per tax year.
- The CGT on any capital gains that are reinvested is deferred.
- Capital gains from investment in the EIS are exempt from CGT, provided that the EIS shares have been held for at least three years.
As with the VCT there are a number of conditions that must be met for the tax
reliefs to be granted.
There is also the Seed Enterprise Investment Scheme (SEIS), which offers even higher tax reliefs than the EIS, as it is targeted at raising funds for small start‑up companies
