Lifetime ISAs (for 18-39-year-olds and a partial replacement for the Help to Buy plans)
Despite the proliferation of different types of ISAs, activity remains dominated by the two basic variants - cash ISAs and stocks and shares ISAs. However, other tax changes in recent years can also be worth bearing in mind:
The Personal Savings Allowance (PSA) allows basic rate taxpayers to earn up to £1,000 interest tax-free (£500 for higher rate taxpayers and nil for additional rate taxpayers). If we assume a 0.5% interest rate then exceeding those thresholds requires a substantial deposit (e.g. £100,000 @ 0.5% = £500). As a result, for many savers, an ordinary bank/building society deposit is as tax-free as a cash ISA.
It is a similar story with stocks and shares ISAs and the dividend allowance, which allow all taxpayers to receive £2,000 of dividends free of tax. At the current average yield on UK shares, that threshold is breached at around £67,800.
For stocks and shares ISAs, there is also the capital gains tax (CGT) annual exemption to consider. At the current level of £12,300, it makes the CGT freedom of ISAs academic for many investors.
So, are ISAs past their best-before dates? Well, for some investors, they could be, particularly if their savings are modest. For many others, ISAs can still offer tangible benefits.
They leave your Personal Savings Allowance, dividend allowance and CGT exemptions unused.
There is nothing to report on your tax return.
If you invest regularly over the long term, the ISA tax freedoms can become highly valuable, as the growing band of stocks and shares ISA millionaires can testify.
Inheritance Tax (IHT)
One often-overlooked benefit is that ISAs can be tax-efficient when you die if you are survived by your spouse. When you die, no more money can be added to your ISA, but your pot can be transferred to your spouse free of inheritance tax.
In addition, if your ISA is transferred to your spouse it doesn’t affect their annual ISA allowance. They will get an extra allowance for one year equivalent to the size of the ISA the spouse left. This is known as ‘additional permitted subscription’. That said, ISAs themselves are not generally inheritance tax-free, so capital and growth could ultimately be taxed at 40% if your estate exceeds the IHT threshold.
However, there is also a way for you to gain exemption from IHT without losing your lifetime ISA tax benefits. That is in an ISA investing in Business Property Relief (BPR) qualifying investments. Since 2013, it has been possible to invest in companies listed on AIM within an ISA. Provided that the companies qualify for BPR, then the ISA can be passed on to beneficiaries after two years, just as with other BPR qualifying investments.
Clearly, though there are greater risks in holding an AIM ISA. The shares of companies listed on AIM tend to be more volatile, which means their value can rise or fall by greater amounts on a day-to-day basis. It’s therefore being mindful that an ISA investing in AIM-listed shares is likely to have a higher risk profile than ISAs with investments in more mainstream equities, bonds or cash.
Finally, if you wanted to reduce the size of your estate further you could use your annual IHT exemption of £3,000 and fund a Junior ISA to benefit your children or grandchildren.
There are pros and cons when deciding to use your savings and place them in a bank savings account, a cash ISA or a stocks and shares ISA. It comes down to your personal circumstances, your objectives and where you are in your life. We would suggest getting advice to decide on the best outcome for you.
At Armstrong Watson, our quest is to help our clients achieve prosperity, a secure future and peace of mind. We can provide bespoke tax planning, financial planning and wealth management all under one roof to help ensure our clients have the best opportunity to pass on their wealth to those they wish to receive it.
This article featured in Insight, our quarterly financial planning and wealth management magazine. To read the latest issue or subscribe to future editions click here.
Contact Steve Shovlin at steve.shovlin@armstrongwatson.co.uk or phone 01228 690200.
