Topic 9 Flashcards
What is a tax wrapper?
A tax wrapper is a structure, like an ISA (Individual Savings Account), that changes the tax treatment of income and capital gains generated from the underlying investments, often providing tax advantages.
At what stages can tax be charged on investments?
Tax can be charged while the funds are invested (income tax) or when funds are drawn or income is paid out (capital gains tax or income tax).
What are the main taxes that affect investments?
The main taxes affecting investments are income tax and capital gains tax (CGT).
Why might an investor use a tax wrapper like an ISA?
Investors use tax wrappers like ISAs to shield their income and capital gains from taxation, allowing their investments to grow tax-free or to receive income without paying income tax.
How does a tax wrapper affect the taxation of income and gains from investments?
A tax wrapper can either eliminate or reduce the tax liability on income and capital gains from the underlying investments, depending on the type of wrapper used.
What is the benefit of using tax wrappers for long-term investment strategies?
Tax wrappers are beneficial for long-term investment strategies because they allow investors to maximize returns by minimizing the tax burden on income and capital gains over time.
How does capital gains tax (CGT) apply to investments outside of a tax wrapper?
When investments outside a tax wrapper are sold, any profit made above the annual CGT allowance may be subject to capital gains tax.
What types of investments can be held within a tax wrapper like an ISA?
Investments such as stocks, bonds, mutual funds, and cash savings can be held within a tax wrapper like an ISA, providing tax advantages for the returns generated by these assets.
What is the purpose of ISAs?
ISAs were introduced in 1999 to encourage people to save and to ensure that tax relief on savings is distributed fairly.
What investments can be held in a stocks and shares ISA?
A stocks and shares ISA can include:
- Shares and corporate bonds issued by companies listed on a recognised exchange anywhere in the world, including AIM shares.
- Gilt-edged securities and similar stocks issued by government of contries 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)
What types of savings can be included in a cash ISA?
A cash ISA can include:
- Bank and building society deposit accounts
- Money-market unit trusts and OEICs
- Stakeholder cash deposit products.
What is an innovative finance ISA?
An innovative finance ISA can include peer-to-peer lending and long-term asset funds, such as privately-owned companies or property funds with extended notice periods.
What is the purpose of a Lifetime ISA?
A Lifetime ISA is designed to help individuals save for their first home or for later life, offering bonuses on contributions.
Why might someone choose a stocks and shares ISA over a cash ISA?
Someone might choose a stocks and shares ISA if they are looking for potentially higher returns through investments in equities, bonds, or unit trusts
Whereas a cash ISA is more suitable for lower-risk savings in deposit accounts.
How does the Lifetime ISA differ from the Help-to-Buy ISA?
The Lifetime ISA replaced the Help-to-Buy ISA, offering a broader scope by allowing savings for both a first home and retirement.
Whereas the Help-to-Buy ISA was specifically designed for first-time homebuyers.
What types of investors would benefit from an innovative finance ISA?
Investors interested in peer-to-peer lending or illiquid assets such as privately-owned companies and property funds may benefit from an innovative finance ISA, as it provides a tax-free wrapper for these types of alternative investments.
What are the benefits of holding assets in an ISA?
The primary benefit of holding assets in an ISA is that any income or capital gains generated from the investments are tax-free, which helps investors grow their savings or investments more efficiently.
What types of investments are allowed in a Lifetime ISA?
A Lifetime ISA allows cash, stocks and shares, or a combination of both, and can be used for saving towards a first home or retirement.
What is the minimum age for opening a Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, or Lifetime ISA?
The minimum age is 18 for all these types of ISAs.
However, a Lifetime ISA can only be opened by individuals under the age of 40.
Can non-UK residents open an ISA?
No.
An ISA investor must be generally resident in the UK for tax purposes to open and contribute to an ISA.
Can an ISA be held jointly with another person?
No.
ISAs can only be held in a single name; joint ISAs are not permitted.
Why does the Lifetime ISA have an additional age restriction compared to other ISAs?
The Lifetime ISA is designed to help younger people save for their first home or retirement, which is why it is only available to those under 40 years of age.
What happens if an ISA holder moves abroad and is no longer a UK resident?
If an ISA holder moves abroad and becomes non-UK resident, they can keep their existing ISA;
But they will no longer be able to contribute to it until they return to the UK and regain residency.
Why are joint ISAs not allowed?
ISAs are individual tax wrappers designed to offer personal tax relief.
Allowing joint accounts would complicate the tax treatment, as ISAs are structured for individual use and tax benefits.
What are the eligibility rules for ISAs?
- The minimum age for investing in a Cash ISA, Stocks and Shares ISA, Innovative Finance ISA or Lifetime ISA is 18 years old; Lifetime ISAs can only be opened by those under 40.
- An ISA innvestor must be generally resident in the UK for tax purposes.
- An ISA can only be held by a single name, ie. joint accounts are NOT permitted
What is the purpose of setting subcription limits for ISAs?
To prevent high-net-worth individuals from benefiting excessively by switching large amounts of savings into ISAs for tax benefits.
Can investors split their contributions across different types of ISAs?
Yes
Investors can split their contributions across different types of ISAs, as long as they do not exceed the overall annual subscription limit.
What happens to an ISA after the account holder dies?
Their ISA becomes a “continuing account of a deceased investor” for up to three years and one day, during which it retains its tax advantages.
No additional funds can be added during this period.
What is an Additional Permitted Subscription (APS)?
APS is an allowance that allows the surviving spouse or civil partner of a deceased ISA holder to make an additional subscription to their own ISA up to the value of the deceased’s ISA, preserving the tax benefits of the savings.
How long does a spouse or civil partner have to use the APS allowance?
The surviving spouse or civil partner has three years from the date of the account holder’s death or 180 days after the administration of the estate, whichever is later, to use the APS for cash ISAs.
For stocks and shares ISAs, the time limit is 180 days after the administration of the estate.
Why are ISA subscription limits important?
Subscription limits ensure that the tax benefits of ISAs are distributed fairly, encouraging those with smaller amounts to save while preventing wealthier individuals from exploiting tax benefits on larger sums.
How does the Additional Permitted Subscription (APS) benefit the surviving spouse or civil partner?
APS allows the surviving spouse or civil partner to preserve the tax advantages of the deceased’s ISA by transferring an equivalent amount into their own ISA, thereby continuing the tax-free growth or income generation of the assets.
What are the implications if a surviving spouse does not use the APS within the allowed time?
If the APS is not used within the time frame (three years for cash ISAs, 180 days after estate administration for stocks and shares ISAs), the surviving spouse loses the opportunity to make the additional subscription, potentially missing out on valuable tax benefits.
Can the APS be used with a different ISA provider?
Yes, the surviving spouse or civil partner can transfer the APS to a different ISA provider, provided the new provider agrees to accept the additional permitted subscriptions.
Can you make multiple subscriptions to the same ISA in a tax year?
Yes.
Investors can make multiple subscriptions to the same type of ISA in a tax year, as long as the total contributions across all ISAs do not exceed the annual limit.
What is the current annual subscription limit for ISAs?
For the 2024/25 tax year, the annual subscription limit for ISAs is £20,000, which can be split across different types of ISAs (cash, stocks and shares, innovative finance, or Lifetime ISAs).
Can the value of an APS exceed the annual subscription limit for regular ISAs?
Yes
The APS is separate from the regular ISA annual subscription limit.
This means that the surviving spouse or civil partner can make an APS contribution in addition to their regular ISA contributions, potentially exceeding the £20,000 limit in that year.
Can funds withdrawn from an ISA be replenished during the same tax year?
Yes
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 the same tax year.
However, not all providers offer this feature.
What happens if you transfer out of a Lifetime ISA before the age of 60?
If you transfer out of a Lifetime ISA before the age of 60, a 25% withdrawal fee is triggered, reducing the value of the funds you receive.
Can you transfer funds from one ISA provider to another without losing the tax benefits?
Yes.
You can transfer funds between ISA providers or different types of ISAs without losing the tax benefits, provided the transfer follows ISA rules and doesn’t exceed the annual limit.
Are there any restrictions on transferring assets from an innovative finance ISA?
While cash can be transferred from an innovative finance ISA, other assets held within it (such as peer-to-peer loans) may not be transferable.
Why might some ISA providers not offer flexibility for replenishing withdrawn funds?
Offering flexibility requires additional administrative processes, and some providers may choose not to offer it to keep their services simpler or reduce costs.
How do withdrawal restrictions impact the use of fixed-rate cash ISAs?
Fixed-rate cash ISAs often come with restrictions that prevent withdrawals during the fixed-rate period.
This means you may face penalties or be unable to access your funds until the term ends, making it less suitable for short-term savings.
What are the benefits of transferring an ISA to another provider?
Transferring an ISA can provide access to better interest rates, lower fees, or investment options that better align with an investor’s financial goals.
It also allows continued tax-free growth of funds.
Why is there a penalty for withdrawing funds from a Lifetime ISA before the age of 60?
The penalty is in place to discourage using the Lifetime ISA for purposes other than its intended goals, which are saving for retirement or buying a first home.
The 25% fee ensures that funds are withdrawn only for these specific purposes.
Sarah invests £15,000 in a stocks and shares ISA on 6 April, where the annual subscription limit is £20,000. On 1 August, she withdraws £4,000, leaving a balance of £11,000.
If her ISA provider offers flexibility, how much can she still invest for the remainder of the tax year?
Since Sarah’s ISA offers flexibility, she can still invest the full amount she withdrew, in addition to her unused annual limit.
The total amount she can invest for the rest of the tax year is £9,000 (£20,000 – £11,000 + £4,000).
Emma invests £10,000 in an innovative finance ISA on 6 April, with the annual limit of £20,000. On 1 September, she withdraws £5,000.
If her ISA provider does not offer flexibility, how much can she still invest for the rest of the tax year?
ince Emma’s ISA does not offer flexibility, her withdrawal reduces her remaining subscription allowance.
Therefore, she can still invest £10,000 (£20,000 – £10,000), and the £5,000 withdrawn cannot be replenished.
David opens a Lifetime ISA and invests £8,000 on 1 April, planning to use it to buy his first home. However, on 1 November, he withdraws £3,000 from the Lifetime ISA for an unrelated reason.
What penalty does David face, and how much will he receive after the penalty?
Lifetime ISA withdrawals before the age of 60 (if not for a first home purchase) incur a 25% penalty.
Therefore, David will face a penalty of £750 (25% of £3,000), and he will receive £2,250 after the penalty.
Tom has invested £6,000 in a fixed-rate cash ISA, with the annual subscription limit being £20,000. After six months, he finds a provider offering a better interest rate and wants to transfer the funds.
Can he transfer the full balance without penalty, and how much can he still invest for the remainder of the year?
If Tom’s fixed-rate cash ISA allows transfers without penalties, he can transfer the full £6,000 to the new provider.
Since the transfer does not affect his annual limit, he can still invest up to £14,000 (£20,000 – £6,000) for the remainder of the tax year.
Lisa has £5,000 in a Help-to-Buy ISA (which is now closed to new applicants). She plans to withdraw £2,000 in July to cover an unexpected expense.
Can she replace the funds later in the tax year?
Help-to-Buy ISAs do not offer the flexibility to replenish withdrawn funds.
Therefore, if Lisa withdraws £2,000, she cannot replace it later in the tax year.
She can still contribute up to the remaining subscription limit for the year, but the withdrawn amount cannot be re-added.
How is a unit trust or OEIC treated for tax purposes if not held within an ISA?
If a unit trust or OEIC is held outside of an ISA, it is potentially liable to income tax on interest or dividends, and to capital gains tax (CGT) when encashed if the gains exceed the annual CGT allowance.
What happens to the tax liability on a unit trust or OEIC held within an ISA?
If a unit trust or OEIC is held within an ISA, there is no liability to income tax or capital gains tax (CGT) on any income or gains generated.
Why might investors prefer to hold unit trusts or OEICs within an ISA?
Investors may prefer to hold unit trusts or OEICs within an ISA to benefit from the tax-free status, as this exempts them from paying income tax on distributions and CGT on capital gains, helping to maximize their returns.
How does the tax treatment of ISA investments benefit long-term investors?
The tax exemption on both income and capital gains in ISAs allows long-term investors to grow their savings without worrying about tax liabilities, which can compound their growth over time compared to taxable investments.
What is a Help-to-Buy ISA?
A Help-to-Buy ISA is a cash ISA designed to help first-time homebuyers in the UK by offering a government bonus on the savings they contribute toward purchasing a home.
When was the Help-to-Buy ISA available to new applicants?
The Help-to-Buy ISA was available from 1 December 2015 until 30 November 2019.
No new accounts could be opened after this date, but existing account holders can continue saving until 30 November 2029.
What is the minimum and maximum government bonus for a Help-to-Buy ISA?
The minimum government bonus is £400 (for savings of £1,600), and the maximum bonus is £3,000 (for savings of £12,000).
What are the price limits on properties eligible for the Help-to-Buy ISA bonus?
The bonus is available on properties valued up to £450,000 in London and £250,000 elsewhere in the UK.
