ISAs - Quite A Line Up!

Lindsey Wicks looks at the growing range of individual savings account (ISA) types on offer.

Income and capital gains from ISA investments are tax-free. Cash ISAs and stocks and shares ISAs are still available, but innovative finance ISAs, help to buy ISAs and lifetime ISAs have been added to the mix. 

The help to buy ISA is a form of cash ISA available to first-time buyers aged over 16. New accounts can be opened for four years from 1 December 2015. Contributions may be made until 2029. A help to buy ISA can’t be opened if a person has saved into another cash ISA in that tax year. A 25% government bonus is available when withdrawing funds for purchasing a qualifying home, subject to a maximum bonus of £3,000. The minimum bonus is £400, requiring an account balance of £1,600.

Innovative finance ISAs, offered since 6 April 2016, include peer-to-peer loans and crowdfunding debentures.

Investments in a lifetime ISA are the same as for a cash or a stocks and shares ISA. Lifetime ISAs, available since 6 April 2017, can be opened by those between the ages of 18 and 40 with contributions being made up to the age of 50. The lifetime ISA is a long-term savings product attracting a 25% government bonus, up to a maximum of £1,000 per year. However, a 25% charge applies to withdrawals, unless the withdrawal is made:

Trap:

Savers may have a help to buy ISA and a lifetime ISA, but will only be able to use the government bonus from one of them to buy their first home.

The ISA subscription limit for the 2017/18 tax year is £20,000. Investors may have one of each type of ISA in a tax year, i.e. one cash ISA (the help to buy ISA being a type of cash ISA), one stocks and shares ISA, one innovative finance ISA and one lifetime ISA. Help to buy ISA savings and lifetime ISA savings count towards the £20,000 limit, but each is subject to its own lower limits. Up to £200 a month can be saved into a help to buy ISA, with the first payment being up to £1,200. The subscription limit for a lifetime ISA is £4,000 in 2017/18.

The subscription limit for a junior ISA is £4,128 in 2017/18.

Peter is 30. He saves £200 a month into a help to buy ISA in 2017/18. Peter can’t have another cash ISA in 2017/18, but he could save up to £4,000 in a lifetime ISA with any balance from the £20,000 limit available to invest in a stocks and shares ISA and/or an innovative finance ISA. 

ISA terms should be checked to determine whether charges or penalties apply on making a withdrawal. 

A 25% charge arises (payable to HMRC) if withdrawals are made other than in three permitted circumstances (see above). 

Flexible ISAs were introduced from 6 April 2016. This refers to the ability to withdraw and save again in the same tax year without reducing the current year’s ISA allowance. Lifetime ISAs and junior ISAs aren’t flexible.

Investors should check with their provider whether their ISA is flexible before making a withdrawal. If £15,000 is invested in 2017/18 and £7,000 is withdrawn, only £5,000 can be saved in 2017/18 tax year the if the ISA isn’t flexible, whereas £12,000 can be saved if the ISA is flexible. 

For ISAs other than lifetime ISAs, transfers of prior year subscriptions don’t count towards the £20,000 subscription limit. Transfers don’t need to be between the same ISA type, but the ISA must permit transfers in. For innovative finance ISAs, it may only be possible to transfer cash from the ISA. Like withdrawals, charges and penalties may apply.

Transfers to and from a lifetime ISA

Transfers of prior year subscriptions from other ISA types to a lifetime ISA do count towards the £4,000 lifetime ISA subscription limit. Transfers from a lifetime ISA are treated as withdrawals, subject to the 25% charge, unless made after the age of 60 or due to terminal illness. For the 2017/18 tax year only, funds held in a help to buy ISA at 5 April 2017 can be transferred to a lifetime ISA without counting towards the 2017/18 subscription limit, so the 25% bonus is potentially available on the combined balance.

For those seeking a government bonus towards the purchase of their first home, all factors should be considered when deciding whether a help to buy ISA or lifetime ISA is suitable and whether an existing help to buy ISA should be transferred to a lifetime ISA. This includes: