Techzone

This is the year ISAs turned 25 and have proved a huge success with savers. The value of adult ISAs stands at over £725 billion, with approximately 60% held in stocks and shares and 40% in cash.

Given the recent cuts in both CGT allowances and the dividend allowance that we already know about together with the frozen tax bands and personal allowances in recent years, the attraction of ISAs will continue to grow as a way of protecting savings from tax. This could be amplified if speculation about CGT rate increases were to become reality.

Background

Introduced in April 1999, they are aimed at encouraging individual savings, offering simplicity, easy access and tax-free growth.

The current annual subscription limit for the last eight years is £20,000. Plans for a new 'UK ISA' allowing an additional £5k for investment into UK companies on top of the normal £20k subscription limit were announced in the Spring Budget. Consultation ended in June this year, just before the general election and it is not known if the new government will follow this through.

Although simple in concept, ISA rules have evolved over the years which may affect how clients manage their ISA savings and the opportunities for achieving better financial planning outcomes. Different types of ISA have also been introduced, including the Junior ISA and Lifetime ISAs, each with their own individual rules.

The main points both advisers and their clients need to be aware of are listed below.

Changes from April 2024:

1. Subscriptions to multiple ISAs. The 'one ISA of each type per tax year' restriction has been removed from April 2024. This simplification means investors will be able to subscribe to multiple cash or stocks and shares ISAs in a year without fear of invalidating their subscriptions and losing tax-free status on their savings.
2. Transfers to other ISAs. It is now possible to do a partial transfer of ISA funds without having to distinguish if the transfer is from current year's subscriptions, previous years, or a mixture of both. Prior to this year, if transfers were being made from the 'current' year's subscriptions, the whole amount of that subscription plus the growth on it would have to be transferred. This was because individuals could only contribute to one cash ISA and one stocks and shares ISA in any year.
3. Cash ISAs from age 16. The age at which an adult ISA can be opened is fixed at 18 across all ISA types from the start of this tax year. This means it is no longer possible to open an adult Cash ISA at age 16, removing the ability for 16 and 17 year olds to pay £29,000 into ISAs by combining subscription limits into both a Cash ISA and Junior ISA. They will be limited to just the £9,000 junior ISA limit.

Changes from earlier years:

4. Flexible ISAs. Providers may offer 'flexible' ISAs under which funds can be withdrawn and fully or partly replaced in the same ISA in the same tax year without counting towards the annual subscription limit. This can be particularly useful for those who need money in an emergency. Clients should check that the ISA manager offers flexibility if this is something they think they may need. Not all providers offer it and if a withdrawal is made from an ISA that doesn't offer flexibility it cannot later be replaced with different ISA manager. Flexibility may be available on both cash and stock and shares ISAs, but not on junior ISAs, Help to Buy ISAs of Lifetime ISAs.
5. Continuing ISA on death. For deaths after April 2018, income and gains will continue to be protected from tax until the earliest of three years, the completion of the estate administration or the ISA is otherwise closed. This gives the executors and beneficiaries some space to decide what to do with the proceeds.
6. Additional Permitted Subscriptions (APS). Widowed clients can also claim a one-off subscription limit equal to the value of their deceased partners ISA at date of death. This can be significant in protecting assets from income and gains beyond the administration period. For deaths after 5 April 2018 the APS will the value at the date of death or at the end of the continuing ISA period. It must be used within three years from the date of death, or 180 days from the end of the estate administration period. Latest government statistics show that individuals in the 65 and over group have the highest average ISA savings of over £63k. The tax benefits of both the continuing ISA and the APS could therefore be considerable.

Other features that may impact on planning include:

7. ISA income and tax allowances. The income generated from ISAs doesn't count towards any of the income definitions that determine the personal allowance, pensions tapered annual allowance or child benefit tax charge.
8. ISA income and IHT. Any income produced in the ISA and taken by the client rather than being reinvested can be included in income with regards to the 'normal expenditure out of income' exemption. If this income adds to, or creates 'surplus' income, it can be given away and will be immediately outside the client's estate.
9. Boosting retirement savings. If they're close to, or at retirement it may make sense to consider maximising pension funding from their ISA savings if they don't have other resources to use. The pension option will, of course, depend on clients having enough pensionable earnings and annual allowance.
   
   Do the maths and it paints a compelling picture for moving ISA funds into pension once access is removed from the equation. Anyone benefiting from higher rate tax relief by using their funds to pay a pension contribution will always get more back, even after paying tax on the income they take from their pension.
   
   For example, a gross pension contribution of £16,667 would actually cost a higher rate taxpayer £10,000. This can be funded from an ISA. Even if it's accessed immediately with income tax at 40% on all the pension income, the return is £11,667 (£7,500 income after tax plus £4,167 tax free cash). That's a 16.67% boost to your client's savings by simply moving it into their pension.
10. ISAs and CGT. ISAs may also help clients who wish to take gains out of a portfolio within their annual capital gains tax allowance. If they want to buy back the same shares or OEICs, they will normally have to wait 30 days because of the 'share matching rules'. But such shares can be bought back through an ISA immediately, so that clients are not out of the market for a month. This transaction is sometimes referred to as 'bed and ISA'.
    
    Any shares received from a company Share Investment Plan (SIP) or SAYE option plan can be transferred to a stocks and shares ISA as long as the ISA manager agrees to take them. The amount transferred counts towards the annual subscription limit. The transfer is free of CGT if it is made within 90 days from the date they leave the scheme.

Statistics taken from HMRC Annual Savings Statistics published September 2024.