Meg Saksida outlines the categories of individual savings accounts available.
In the first two articles in this series, I discussed the possibilities of investing in sterling, wasting chattels, chattels costing and being sold for £6,000 and under, and investments.
This month, I turn to individual savings accounts (ISAs).
Individual savings accounts
ISAs were introduced 20 years ago, replacing the previous personal equity plans (PEPs) and tax exempt special savings accounts (TESSA’s). Introduced to encourage investment, in addition to the generous income tax advantages of the ISA the exemption from capital gains tax (CGT) makes them a perfect vehicle for generating capital growth that is not taxed. The cost to the government is not insignificant at approximately £3 billion (£2.9 billion in the tax year 2017/18).
ISAs comprise three different types of investments; cash, stocks and shares, and innovative finance ISAs. Cash and stocks and shares ISAs include the latest arm to the scheme; lifetime ISAs.
Lifetime ISAs were introduced from April 2017 and are only available to individuals who were under 40 years old at the time of investment. Those eligible could invest up to £4,000 annually and the government pledged to pay a bonus of 25% up to £1,000 a year. The funds saved in a lifetime ISA can be used either as a deposit to purchase a home worth up to £450,000 (throughout the UK) or used as a retirement income if retained in the scheme until the individual reaches the age of 60.
Limits on investment tended to increase with inflation but have remained the same since 2017/18 at £20,000.
Funds held in a stocks and shares ISA may only be transferred into another stocks and shares ISA, whereas funds in a cash ISA can be transferred into either another cash or another stocks and shares ISA.
Junior ISAs
Junior ISAs were introduced in November 2011 to allow children who did not have one of the ‘child trust fund’ accounts (which were available to children born between 1 September 2002 and 2 January 2011) to invest. They can invest in cash or stocks and shares ISAs, but once the funds are invested they cannot be accessed until they are 18 years old. At this point, the funds may either be withdrawn or transferred into an adult ISA.
There is a two-year cross over with the adult ISAs, which can be invested in from the age of 16, so an individual may have a junior ISA, which is available until 18 but also purchase an adult ISA at the age of 16.
Junior ISAs are available up to a limit of £4,368 (for 2019/20) annually.
Help to buy ISA
Another arm of the ISA investment scheme is the help to buy ISA, which was introduced in December 2015.
Aiming to assist young people purchase their first homes, a 25% bonus was added to the savings by the government when a property of £250,000 or less (£450,000 or less in London) was purchased, up to a maximum of £3,000. The scheme was open throughout 2016, 2017, and 2018, but closed on 30 November 2019. However, despite the scheme now being closed those savers that have opened a scheme have until 1 December 2030 to purchase their home and claim the bonus.
Irrespective of the size of any gain made on the investment, all ISA accounts are completely free of CGT. Note, however, that any capital losses made cannot be used to offset other chargeable gains.
