With so much legislation change surrounding ISAs recently, it can be difficult to know where to start when you’re looking to make the most of your tax-free savings.
With effect from the 6th April 2017, the ISA limit has been increased to £20,000, meaning people can save more of their cash tax-free. However, since the ISA launched back in 1999, a whole range of different types have been created, which means there are a myriad of options for savers to consider.
In this blog article, we’ll cover some of the most efficient ways to use your ISA allowance.
Ways to use your ISA allowance
The different ISA types are summarised in the table below.
Cash ISAs and Stocks and Shares (‘Investment’) ISAs are likely to continue to be the most commonly used but there are now a variety of options to consider.
Investment ISAs can be invested across a number of assets including mutual funds, shares, Exchange Traded Funds, Investment Trusts, gilts and corporate bonds. Within an Investment ISA no income tax is deducted from dividends or interest and any gains are completely free from capital gains tax.
Alternative Investment Market (AIM) ISAs
A rule change back in 2013 means that AIM-listed stocks and shares can also now be held in an Investment ISA. Money invested directly in Alternative Investment Market (AIM) listed shares are potentially exempt from inheritance tax, subject to certain circumstances. Provided that you have held the investment for at least two years when you die, the funds can be left to your beneficiaries free from inheritance tax.
The new Lifetime ISA (LISA) launched on the 6th April 2017, and whilst only a few providers are currently offering them, the LISA allows you to save up to £4,000 tax free each year. The government will then add a 25% bonus on top of what you have already paid in, so if you save the full £4,000 each year, you’ll have £5,000 at the end of the tax year.
LISAs are available for savers aged between 18 and 39, and have been designed for two specific purposes: to fund a first-time property purchase and to save for retirement.
You may take some or all your cash out of a LISA before your 60th birthday even if you’re not buying a property. In the first year that LISAs are available, there won’t be a penalty for doing so, although you won’t receive your bonus as this is only paid at the end of the first year. After the first year, there would be a 25% penalty for withdrawing the cash so it is best to use the LISA if you’re sure that the cash will be used for one of the two defined purposes.
Transfer between ISA types
ISAs can be a great way to grow your savings tax-free but just because an account is an ISA, it doesn’t necessarily mean that you’re getting a good return. To benefit from a better rate of return or to make your money easier to manage, you may wish to consider transferring your ISA.
You are able to transfer your ISA from one provider to another at any time. It is possible to transfer ISA funds from cash to investment and vice versa.
Spousal transfer on death
New rules came into force in April 2015, which mean that you can now inherit your partner’s ISA savings. The rules mean that if an ISA holder dies, the surviving spouse or civil partner will be able to inherit the ISA and retain its tax-free benefits.
The surviving partner is given an ‘additional permitted subscription’ known as an APS: a one-off ISA allowance that’s equal to the value of the ISA at the date of the holder’s death. This won’t be counted against the normal ISA subscription limit but will instead be added on to the surviving partner’s own ISA limit.
Anybody whose spouse or civil partner died on or after 3rd December 2014 is eligible, and the APS could have been claimed since the start of the 2015/16 tax year.
Do I really need an ISA?
With the introduction of the new personal savings allowance in 2016, you may be wondering whether you really need an ISA. Those with lower amounts to save will often find better interest rates than cash ISAs in high-interest current accounts, however for wealthier investors, ISAS still remain a valuable way to make your money work as efficiently as possible.
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For further information and advice on utilising your ISA allowances, please contact Springfield Financial Services Limited on 01772 729742 or fill out our online enquiry form.