The Autumn Budget 2017 made surprisingly few tweaks to the pensions and savings regime. However, a notable change came in the form of the junior ISA subscription limit being uprated to £4,260, in line with current CPI.
ISAs – The history
Individual Savings Accounts, more commonly known as ISAs, are funds in which UK residents can hold a range of different investments, tax free.
They were introduced in 1999 with the intention of replacing the earlier Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs), the former being very similar to a Stocks and Shares ISA and the latter bearing resemblance to the Cash ISAs we are familiar with today.
November 2011 saw the launch of the Junior ISA (JISA), which replaced the Child Trust Fund. JISAs allow cash or stocks and shares to be saved, tax-free, for the benefit of the child.
ISAs – The benefits
ISAs are attractive as savings accounts for many because they provide shelter from various different types of taxation.
ISAs’ main selling points are:
- No tax on income or gains
- No tax on Capital Gains which arise when you cash in your ISA
- No minimum holding period
ISAs – The types
The four types of ISA are:
- Stocks and Shares ISAs,
- Lifetime ISAs,
- Cash ISAs, and,
- Innovative ISAs.
You can invest into one of each kind of ISA each tax year, according to the government website.
ISAs – who can open an ISA?
For adult ISAs, you must be:
- 16 or over (for a Cash ISA)
- 18 or over (for a Stocks and Shares or Innovative Finance ISA)
- Between 18 and 40 (for a Lifetime ISA)
- A UK resident
- A crown servant (for example, diplomatic or overseas civil service) or their spouse/civil partner should you live outside of the UK.
You cannot hold an ISA on behalf of anyone else or alongside anyone else. It must be in your name and solely for your benefit.
There is one exception – the Junior ISA. If you want to manage of these for your child, your child must be:
- Under 18
- Living in the UK
If the child lives outside of the UK, but depends on you for care or is the child of a Crown Servant, they will also qualify for an ISA.
ISAs – Junior ISAs (JISAs)
Junior ISAs fall into one of two categories:
- Cash JISAs – there is no tax on any interest made on the cash the child saves
- Stocks and Shares JISAs – no tax is charged on any investment made or any capital growth or dividends you receive as a result
JISAs are locked until the child reaches 18 years of age except in the case of terminally ill children or on premature death. Your child can only hold one of each ISA at a time. Transfers between the two different types of ISA are allowed.
As with ISAs, any incomes and gains within a JISA is tax-free – this does of course mean that losses cannot be offset as tax relief. The subscription limit for JISAs has risen from £4,128 across the 2017/18 tax year, to £4,260, however as stated previously, a child can only have one of each ISA at each time.
Similarly, if the child is in receipt of a Child Trust Fund (CTF), the pre-2011 offering, they cannot concurrently hold a JISA. You can transfer savings from an about-to-be-closed CTF into a Junior ISA if necessary.
ISAs – Making investments
Making investments in an ISA is attractive because of the broad range of options there are for saving, tax free.
Each tax year, you’re allowed to put money into one of each kind of ISA. The overall cap on savings across however many ISAs you have is £20,000 for the 2018/19 tax year. This means you can have the equivalent of £5,000 in four different types of ISA across one tax year, or you could simply save £20,000 in a single ISA.
ISAs – What can I include in my ISAs?
Savings in bank and building society accounts and some National Savings and Investments products can be included in a Cash ISA as long as they do not exceed the cap.
Stocks and Shares ISAs can include shares in companies, unit trusts and investment funds, corporate bonds, and government bonds. If you’re the holder of non-ISA shares, you can’t transfer them into an ISA, sadly. An exception to this rule is if the shares are from an employee share scheme such as Save As You Earn (SAYE) or the EMI scheme.
Lifetime ISAs can include either cash, or stocks and shares, but are available only to those between 18 and 40.
Innovative finance ISAs can house peer-to-peer loans, and ‘crowdfunding debentures’ – the former refers to loans you give out to people or businesses without using a bank, and the latter to the term used when someone invests in a business by buying its debt.
If you’ve got a child who will benefit from the JISA subscription limit increase, you may want to talk to someone about how you could use this to their advantage.
Don’t hesitate to get in touch with Smart Team on 01202 577 500 or email us on [email protected].