What is ISA
An Individual Savings Account or New ISA is a class of retail investment arrangements available to residents of the United Kingdom. It qualifies for a favourable tax status. Payments into the account are made from after tax income.
The account is exempt from income tax and capital gains tax on the investment returns, and no tax is payable on money withdrawn from the scheme either. Cash and a broad range of investments can be held within the arrangement, and there is no restriction on when or how much money can be withdrawn. Many restrictions were significantly relaxed from June 2014 when the New ISA name was introduced. Funds cannot be used as security for a loan. It is not a pension product, but can be a useful way to save for retirement, particularly when the flexibility is desired to draw down capital at a faster rate than has until now been permitted in a pension.
An account which enjoys tax free status, usually deposits with £75,000 FSCS protection but client money with £50,000 protection or unprotected money is also permitted; the providers are required to make the protection clear. These are normally offered by banks and building societies but investment firms can also offer them. It is mandatory that money held in a cash ISA be made available on request within 15 days but it is permitted to have a loss of interest penalty for this and this is how term deposits are typically made available.
Under the ISA rules, a cash ISA can also hold qualifying investments that fail the 5% test for holding within a stocks and shares ISA, but this facility is rarely, if ever, made available by the cash ISA provider. Such investments would not be deposits and would not have the £75,000 FSCS protection, they may have the £50,000 investment protection instead, the provider must make the situation clear.
Stocks and Shares ISA
The money is invested in ‘qualifying investments’. Qualifying investments are:
- UCITS authorised funds like unit trusts and open-ended investment companies.
- investment trusts that satisfy various possible conditions
- stock market company shares listed on one of the many recognised stock exchanges. Merely being traded is insufficient, it must be a full listing, and this includes AIM’ PLUS-quoted and PLUS-traded market segments, but PLUS itself is acceptable; shares in unquoted companies; warrants; futures and options. From 5 August 2013, AIM shares are allowed in ISAs.
- public debt securities such as government, corporate bonds, debentures and Eurobonds.
- From 1 July 2014, some Core Capital Deferred Shares issued by building societies, some types of insurance policy and other investments that previously failed the 5% test.
It is mandatory that money held in a S&S ISA be made available on request within 30 days but it is permitted to have a loss of interest penalty for this. A S&S ISA with a deposit facility may impose a loss of interest penalty to comply with this requirement.
Interest on deposits in a cash ISA is not taxed, whether it is an instant access or term deposit. Nor is interest on cash in a S&S ISA. Dividends are not subject to additional tax, interest on bonds is not taxed, and capital gains are not taxed (nor may capital losses be used to offset other gains). There is no need to report interest or other income, capital gains or trades to HMRC as it is not taxable income. This is a considerable paperwork reduction for active traders or those who may otherwise be required to report their trades because they have total sales value exceeding four times the annual CGT allowance, which outside a tax wrapper would require that all trades be reported even if there is no capital gains tax to pay. Since the income is not taxable it does not count for age-related personal income tax allowance reduction (although this age-related element is now being phased out).