One of the most tax-efficient vehicles you can invest in is an Individual Savings Account (ISA) which is free from UK income tax and capital gains tax.
Inflation eats away the value and buying power of your cash savings over time.
However, if you invest long-term, this helps protect the value of your money.
Who can invest in an ISA and types of ISAs
- Cash ISA: You can earn tax free interest on your cash savings. You must be aged 16 or over to open one.
- Stocks and Shares ISA: You can invest in shares in companies, index funds and/or bonds. You must be over age 18.
- Innovative Finance ISA: this facilitates peer-to-peer (P2P) lending investments and ‘crowd funding debentures’ i.e. investing in a business by buying its debt.
- Lifetime ISA (LISA): This can include investing in cash and/or stocks and shares. You must be over age 18 but under 40.
You must also be either:
- a resident of the UK
- a Crown servant (e.g., diplomatic, or overseas civil service) or their spouse or civil partner if you do not live in the UK.
The annual limit is £20,000 for the UK tax year (e.g., 6 April 2024 to 5 April 2025). The limit for a LISA is £4,000. If you don’t use it, you lose it, as you cannot carry over unused allowances.
You can invest all your annual allowance into one of each kind of ISA. A change made by the UK Chancellor from 2024/2025 is that you can contribute into multiple ISAs of the same type with different providers each tax year. This excludes the Lifetime ISA.
For example:
You could save £1,000 in a Cash ISA with Provder A, £1,000 in a Cash ISA with Provider B, £11,000 in a Stocks and Shares ISA, £3,000 in an Innovative Finance ISA and £4,000 in a Lifetime ISA in one tax year.
Or
Simply save up to £20,000 into a Stocks and Shares ISA
As an example of how your money could grow free of UK income tax and CGT, if you started with zero and invested the full £20k per year into a Stocks and Shares ISA at.
8% return for 20 years, you would have £954k.
@8% return, Calculator. net
5% return for 20 years, you would have £679k.
@5% return, Calculator.net
Opening an ISA
You can open an ISA from, for example, a bank, building society, stockbrokers. Contact the provider directly to open an account with them.
You can open one with as little as £1.
Withdrawing Money
You can withdraw the money at any time without losing any tax benefits. Note that there are different rules for taking your money out of a Lifetime ISA.
If your ISA is ‘flexible’, you can withdraw cash and then put it back in during the same tax year without reducing the current tax year’s allowance. Check with your provider whether your ISA is flexible.
Transferring your ISA
You can transfer all or part of your ISA from one provider to another regardless of when you contributed the money into your ISA. Check with your current provider whether they impose restrictions and/or charges on any transfers. To make the move, contact the new provider and complete the ISA transfer form to transfer it.
There are restrictions on transfers to other providers if you have a Lifetime ISA or a Junior ISA.
What happens when you move abroad?
If you leave the UK and move abroad, you cannot add money to the ISA after the tax year that you move, unless:
· you are a Crown employee working abroad
· or their spouse or civil partner
You must advise your provider as soon as you cease being a UK resident.
You can keep your ISA open and get UK tax relief on investments or cash held in it.
If you return to the UK, you can resume paying into it again.
What happens to your ISA if you die?
Your ISA forms part of your estate for inheritance tax purposes. If you die, it will be passed on to your beneficiaries.
Your ISA ends when either:
· your executor closes it.
· the administration of your estate is completed.
If neither of the above takes place, then your provider will close your ISA 3 years and 1 day after you die. Your ISA can continue to grow free of Income Tax or Capital Gains Tax up to that date. However, no one will be able to pay into it.
For stocks and shares ISAs, your ISA provider can be instructed to either:
· sell the investments and pay the cash proceeds to either the administrator or beneficiary of your estate.
· transfer the investments, without being sold to your surviving spouse’s or civil partner’s ISA – this is only possible if they have the same ISA provider as you.
Check the terms and conditions of your ISA for details.
Inheriting an ISA from your spouse or civil partner
If your spouse or civil partner passes away, and they had an ISA, you can inherit their ISA allowance through an Additional Permitted Subscription (APS), also known as an inherited ISA allowance. Note that you must have been living with the deceased spouse or civil partner at the time they passed away to utilise this APS.
As well as your normal £20,000 ISA allowance you can add an additional one-off tax-free APS ISA allowance up to either:
· the value they held in their ISA when they died.
· the value of their ISA when it’s closed.
For example
You have maxed out your ISA for 2023/2024 i.e. £20,000.
Your spouse passed away and had £60,000 in their ISA. Your total allowance for 2023/2024 is now £80,000.
In Summary
Investing in an ISA is one of the most tax-efficient ways to invest offering you the opportunity to invest and grow your money free from UK income tax and capital gains tax.
There are other types of ISA’s you can invest in depending on your age. They are Lifetime ISA and Junior ISA.
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