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  • Shepherd Partnership

The benefits of Individual Savings Accounts (ISAs)

For some people, ISAs are a tax efficient way of investing. An ISA is a savings account or an investment in stocks and shares held within a tax-free wrapper.

The maximum you can invest in a cash or stocks and shares ISA is £20,000 in 2022/23. This is not carried over if it is unused.

Tax advantages of ISAs

Those people who are saving over the long term might find that failing to utilise ISA allowances could be costly over time. Those who are likely to benefit most from a tax-free wrapper are additional rate taxpayers who have no Personal Savings Allowance and pay Income Tax at 45% on savings interest and 39.35% on dividends.

Many savers choose to invest in their ISA towards the end of the tax year but it more tax efficient to utilise the allowance early on in the tax year. With the tax year end in sight, if you have not utilised your allowance, you could take out an ISA each side of the 5th April 2023.

Lifetime ISA

A Lifetime ISA is for those aged between 18 and 40 who either wanting to save for retirement or to buy their first home.

The maximum amount you can invest per tax year is £4,000. The main appeal of a Lifetime ISA is that the government will add a 25% bonus to the amount you pay in which could mean a top up of £1,000 per year.

The limitation is that withdrawals which do not meet certain conditions will incur a 25% charge, which, in effect, recovers the contribution the government has made.

To avoid the 25% charge withdrawals must be when you either aged 60 or over, buying your first home or if you are terminally ill.

Junior ISAs (JISAs)

JISAs can either be cash or stocks and shares. Contributions are limited to £9,000 in 2022/23. Once the child reaches 18 years of age it will convert an adult ISA and retain its tax-free status.

Innovative finance ISA (IFISA)

An IFISA is an ISA which contains peer-to-peer loans. It works by matching up investors and borrowers.

Because banks are cut out, interest rates might be higher but we would always recommend taking advice from a financial adviser because of the risks involved.

Can you move an existing portfolio into an ISA?

Shares cannot be transferred into a stocks and shares ISA so quite often a process, known as bed and ISA, in which shares are sold and the proceeds put into an ISA to buy back the shares. This generally creates a capital gain. However, selling shares to raise the £20,000 annual ISA allowance may produce a gain which is less than the 2022/23 £12,300 Capital Gains Tax annual exemption. In 2023/24 the annual exemption is dropping to £6,000, which might mean funding an ISA subscription by selling shares in a general investment portfolio will be more likely to generate a Capital Gains Tax liability than has been the case. From 2024/25 onwards the annual exemption will be just £3,000.

How are ISAs taxed on death?

The tax-free status of an ISA does not extend to Inheritance Tax (IHT) and the value of an ISA will form part of the individual’s death estate. However, where the transfer is to a spouse or civil partner it will be covered by the exemption which exists for inter-spouse transfers.

Where there is a surviving spouse, there are two options available. An additional ISA allowance can be taken based on the value of the deceased’s ISA or they transfer the ISA into their own name, within a specified time limit.

Within the estate itself, ISAs retain their tax-free status for a maximum of three years from death allowing time for the executors to receive income and realise gains in the period of administration without incurring tax liabilities.

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