WHAT IS AN ISA?

An Individual Savings Account (ISA) is a type of tax efficient investment plan, introduced by the Government as a replacement for Personal Equity Plans (PEPs) and Tax Exempt Special Savings Accounts (TESSAs), but with similar tax advantages, from 6 April 1999.

What can I invest in?

An ISA can offer up to two types of savings and investments. These are called components and you can invest in one or both of them:

• stocks and shares (including unit trusts, investment trusts, certain gilts, insurance policies and open ended investment companies)
• cash (including certain National Savings products).

What are the different types of ISA I can invest in?

Each tax year you can invest in either:

• a MAXI plan. This has a single plan manager who is able to accept the whole subscription. The manager may offer both components, but you must invest part of the funds in stocks and shares, or
• up to two MINI plans. Each plan will offer only one component and you may invest in both of the different types of mini ISA in the same tax year and with a different fund manager for each.

In addition, you can invest in a TESSA ONLY plan which will accept the capital proceeds of a matured TESSA. These proceeds can, alternatively, be invested into the cash component of an ordinary ISA instead.

However, you must NOT have, in the same tax year:

• more than one MAXI plan
• both a MAXI and a MINI plan
• more than one MINI plan investing in the same component
• a transfer from a MINI to a MAXI (and vice versa).

From April 2008, the distinction between MAXI and MINI ISAs will be removed. Individuals will then be able to invest in either a cash ISA, a stocks and shares ISA or both.

What is the tax position?

Interest, dividends and bonuses from investments are exempt from income tax. However, the 10% tax credit on dividends can no longer be reclaimed by the ISA manager.

Capital gains on investments are not liable to Capital Gains Tax (CGT). Capital losses are not allowable against non-ISA gains.

How much can I invest?

The maximum investment is £7,000 in each tax year, increasing to £7,200 from April 2008, with the respective maximum cash element being £3,000, increasing to £3,600 from April 2008.

If you open a MINI plan for cash you can invest in stocks and shares through a further MINI plan. However, if you want to place more than £4,000 in stocks and shares, you must open a MAXI plan.

Who can invest in an ISA?

ISAs are available to individuals who are resident and ordinarily resident in the UK and are aged 18 or over. Crown employees serving overseas (and their spouses) also qualify. If an individual becomes non-resident, they may retain the ISA but no further contributions can be made until they become resident again.

To encourage younger savers, since 6 April 2001 16 and 17 year olds have been able to invest in a MINI (cash) ISA or the cash element of a MAXI ISA. From April 2008 individuals between 16 and 18 may invest only up to £3,600 in a cash ISA.

It should be noted however that if a parent gives their child funds to invest in an ISA, and the investment income arising on all gifts from that parent to their (minor and unmarried) child exceeds £100 in the year, then the parent will be taxed on any income arising in the ISA as if that income were their own!

It is not possible to have a jointly owned ISA and ownership cannot be transferred to another individual or be assigned or written under trust.

What is the CAT standard?

This is a benchmark introduced by the government which is not a kitemark or a guarantee of any type. It is merely an indication that a product matches or exceeds certain criteria based on reasonable Cost, easy Access and fair Terms.

This benchmarking is voluntary and there is no compulsion for providers to offer benchmarked products. There are separate CAT standards for each component of an ISA ie stocks and shares and cash. Non-benchmarked products are permitted but the literature must make it clear that it does not meet the benchmark standards.

What are the qualifying investments for the cash component?

• Cash deposited in a deposit account with a bank or building society
• units in a “money market” fund
• units in a “fund of funds” which is restricted to money market funds
• certain specified accounts offered by National Savings.

What are the qualifying investments for the shares component?

• Shares and securities issued by a company which is incorporated anywhere in the world, and which are listed on a stock exchange recognised by HM Revenue & Customs. Securities must have at least five years to run and may include loans, loan stock, debentures and Eurobonds
• gilts and gilt strips which have at least five years to run until redemption at the time they are first acquired for the ISA
• units in qualifying authorised unit trusts
• shares in qualifying open ended investment companies (OEICs)
• shares in qualifying investment trusts
• units or shares in a relevant undertaking for collective investment in transferable securities (UCITS)
• shares acquired by employees from an approved all employee savings related share option and/or profit sharing scheme eg they could be unlisted. There is a 90 day time limit for transferring the shares into the ISA
• certain life assurance policies
• cash may only be held for the purpose of investment in qualifying investments as above. If held a tax charge of 20% will be levied on the interest.

What will happen to my existing PEP investments?

No new contributions are permitted to a PEP after 5 April 1999. However, existing investments continue to be protected from income tax and capital gains tax as before. It is still possible to transfer your PEPs between different managers if you wish but you cannot transfer these to an ISA.

From 6 April 2001, the distinction between general and single company PEPs has been removed and investors can merge existing general and single PEPs, if they wish.

Who do I contact?

ISAs offer an opportunity to invest in a tax-free way with access to capital when required. However, with the wide range of ISAs on the market it is best to seek further information prior to investment. If you would like more information concerning this subject, or any other aspect of personal financial planning, please contact the person who normally deals with your financial planning affairs or your local Grant Thornton office below.