What is an ISA?
The term “ISA” stands for “Individual Savings Account” and allows you to save into a cash savings or investment account without paying any tax on the interest/growth earned within the ISA, or on the money you take from the ISA. For tax year 2019/20 you can pay a maximum of £20,000 into an ISA, this can be split between the different types of ISA, which are explained below. Each eligible individual can contribute to one each of the following per tax year – Cash ISA (which includes the Help to Buy ISA if eligible), Investment (Stocks and Shares) ISA, Lifetime ISA (if eligible) and Innovative Finance ISA. All contributions count towards the £20,000 ISA annual limit (and the Help to Buy and Lifetime ISAs have their own limits within the overall £20,000 limit).
Cash ISA: Cash ISAs work like a traditional savings account but have the tax benefits that come with an ISA - the interest you earn is tax-free, as are the withdrawals. You can open a Cash ISA if you are over 16 years old.
Investment ISA: Investment ISAs (also known as Stocks and Shares ISAs or Equity ISAs) are investment accounts, capable of holding a wide range of assets (such as shares, funds, government or corporate bonds, property, etc). Any interest or growth earned, as well as money withdrawn from the ISA, are free from income and capital gains tax. You can open a Stocks and Shares ISA if you are over 18 years old.
Whenever you consider investing your money, you should factor in your attitude to risk before choosing your investments, as you may get back less money than you put in.
Innovative Finance ISA: Innovative Finance ISAs work through peer-to-peer lending, matching the money you want to invest with a borrower that wants the money (usually someone unable to get a traditional bank loan) that is willing to pay a higher rate of interest. The interest they pay on their loan is the interest you receive back on your investment. Generally, higher rates of interest are paid by higher risk individuals, meaning there is a higher risk of the borrower defaulting on their loan and therefore no guarantee you will receive all your money back. You can open an Innovative Finance ISA if you are over 18 years old, but you’re only allowed to open and pay into one Innovative Finance ISA in each tax year.
Help to Buy ISA: A Help to Buy ISA is a government-backed Cash ISA to help first-time buyers get on the housing ladder (you can’t contribute to one of these and an ordinary Cash ISA in the same tax year). The government pays a 25% bonus on whatever you have saved at the point when you withdraw your savings for use as or towards a mortgage deposit. You can open a Help to Buy ISA as long as you are a first-time buyer, but you’ll have to apply before 30th November 2019 as the scheme is set to close to new savers. When you open the ISA, you can deposit up to £1,200, then you can pay in up to £200 a month thereafter. The minimum government bonus is £400, meaning that you need to have saved at least £1,600 into your Help to Buy: ISA before you can claim your bonus. The maximum government bonus you can receive is £3,000 – to receive that, you need to have saved £12,000.
Whatever you pay in will come out of your £20,000 ISA allowance.
Lifetime ISA: The Lifetime ISA is another government-backed ISA to help people buy their first home and can also be used to save for retirement. There are Cash Lifetime ISAs as well as Investment ISA options. Anyone between the ages of 18 and 39 can open a Lifetime ISA, but you can only put money towards a property purchase if it will be used to buy your first home. You can pay in up to £4,000 each year to the Lifetime ISA, which will come out of your £20,000 ISA allowance. The government pays a 25% bonus on whatever you save up to a maximum of £1,000 each year and the bonus is paid into your Lifetime ISA account monthly and so benefits from compounding. If you use the money for retirement, you can only pay into the account until you're 50-years-old and you must wait until you're 60 to withdraw it if the funds are not to be used to purchase your first house.
Junior ISA (JISA): Junior ISAs work in the same way as Cash or Investment ISAs but are specifically for account holders under the age of 18. The child’s parent/guardian opens and manages the account for them and anyone can pay into it until the child turns 18, at which time it will convert to an adult ISA and they'll gain control of the money that's been saved. Up to £4,368 can be paid into the ISA in the 2019/20 tax year, and this will use the child’s JISA allowance, which means you can still contribute the full £20,000 a year to your own ISA. Any child holding a Child Trust Fund (CTF) isn’t eligible to open a JISA unless they first transfer all the CTF funds to the JISA and close the CTF.
What is a General Investment Account (GIA)?
A General Investment Account (also called a Personal Portfolio or Collective Investment Account) is a wrapper that you can use to hold shares, commercial property, government and corporate bonds and collective investments such as unit trusts and open-ended investment companies, much in the same way as you can with a Stocks and Shares ISA. However, a GIA does not have the same tax advantages of an ISA, therefore gains and returns will be subject to tax.
You can make lump sum or regular contributions and there is normally no limit as to how much you can pay in to a GIA.
General Investment Accounts are best used when you wish to invest without using your ISA or pension allowance. For tax efficiency, it is possible to sell investments in a GIA and purchase them in an ISA (a process known as Bed & ISA) the benefit of doing so is that you won't pay capital gains tax on future gains your investments make, although by selling them in the first instance there may be a taxable capital gain.
What is an Investment Bond?
An Investment Bond, while technically being a single premium life insurance policy, is a lump sum investment. Investment Bonds are non-income producing investments and so have a different tax treatment from other investments. This can provide valuable tax planning opportunities. You can withdraw up to 5% each year of the amount you have paid into your bond without paying any immediate tax on it. This allowance is cumulative so any unused part of this 5% limit can be carried forward to future years (although the total cannot be greater than 100% of the amount paid in).
Certain events, also known as chargeable events, that can occur during the lifetime of your Investment Bond may trigger a potential Income Tax liability:
• Death giving rise to payment of benefits.
• Transfers of legal ownership of part or all of the bond for money or money’s worth (not gifts)
• On the maturity of the bond
• You cash in all your bond or individual policies within it
• You withdraw more than the 5% a year tax-deferred allowance
Investment Bonds mainly fall into two categories, Onshore and Offshore*. The main difference between the two types is their tax treatment.
Onshore Bonds are offered by life offices based in the UK and therefore the funds underlying the bond are subject to UK life fund taxation. This means that you are treated as having paid basic rate income tax on the amount of your gain. This notional tax is not repayable in any circumstances. There is no liability to Capital Gains Tax or basic rate Income Tax on bond gains. If you are a higher or additional rate taxpayer, you will be subject to further taxes of 20% and 25% respectively on the gain. A basic rate taxpayer will only have further tax to pay if the average gain (known as the top-sliced gain) takes their income into the higher rate tax band.
Offshore bonds* are offered by life offices based outside of mainland UK and are different to onshore bonds in that no income or capital gains tax is payable on the underlying investment (apart from withholding tax, that may be payable and cannot be recovered, which is deducted from certain income received by the fund). This allows untaxed growth to roll up in the bond and benefit from compounding. When a chargeable event occurs income tax is paid on any gain in the bond at your highest marginal tax rate unless covered by an allowance such as the Personal Savings Allowance or if the gain falls within the starting rate band for savings (if available). The gain can be averaged (top-sliced) to assess whether any higher or additional rate tax is due.
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
* Post Brexit, it is expected that all new Offshore policyholders will not be eligible for FSCS and FOS protection.