All you need to know about ISAs

What is an ISA?

An ISA (Individual Savings Account) is a tax-free way to save or invest. If you’re starting to think about saving or investing, ISAs could be a good place to start. On other savings accounts, you may have to pay income tax on the interest you earn. The interest on a cash ISA is free from tax, so all the interest you earn, you keep. In fact, these investments are often referred to as a ‘tax-free wrapper’. The
benefits can be used on a range of investment types, as shown below in the variety options you have access to.

Advantage of ISA

Tax advantages fall into two categories: capital gains tax and income tax benefits.

ISA Income Tax Benefits
In most situations, any income you earn, through wages, interest or dividends, is subject to income tax. However, that is not the case with ISAs. All of the money you earn on these savings vehicles is completely tax-free. Income tax benefits are just part of the equation when you are considering an ISA, however. The other advantage to these accounts is the capital gains tax benefits you can enjoy.
ISA Capital Gains Tax Benefits
Capital gains tax benefits specifically apply to Stocks and Shares ISAs. Most investment products are subject to a capital gains tax if the amount of earnings from your shares in a single year exceeds the set limit. This tax rule is waived for investments in ISAs, making them definitely worthwhile for those who plan to sell or make a a large gain.

Know your options

ISAs have evolved into five different shapes, Cash ISAs, Stocks & Shares ISAs, Innovative Finance ISAs, Lifetime ISAs and Junior ISAs. Clients should consider what their savings goals are before choosing their preferred self-investment vehicle, or by seeking financial advice.

Key facts:

  • The ISA allowance is £20,000 per annum for the 2018/19 tax year.
  • HMRC states you cannot contributue into two of the same ISA type in the same tax year.
  • All income and growth within your ISA is completely tax-free.
  • ISAs are taxable for inheritance tax unless they invest in qualifying investments for inheritance tax relief.


Cash ISAs

  • Lets you manage your money like a typical savings account.
  • They could offer instant access or pay a fixed rate of interest over a few years if you don’t think you’ll need access to your savings.
  • Designed as low risk, no chance of loss products operating at a defined interest rate.
  • Interest rates align with the Bank of England base rate, so at present, offer very low interest.
  • Some ISAs allow you to lock in for a fixed term, thus increasing the interest payments.
  • Speak to us for the best rates. 

 Stocks & Shares ISAs

  • Your money is invested in the stock market.
  • They’re designed for people who are happy to invest over a long period of time and are looking for potentially higher returns. You need to accept risks that come with investing in the stock market.
  • The funds AWM would look to invest you in are low cost managed solutions to reduce fees where possible.

Innovative Finance ISA

  • Designed for sophisticated Peer to Peer lending.
  • This vehicle has been available since 6th April 2016, allowing investors tax-free gains on the capital invested.
  • The IFISA is designed for higher risk clients, as their capital is exposed to default risk or missed payments, as opposed to equity or fund based risk.
  • Due to the new nature of IFISA, we strongly suggest contacting us for more information.

Lifetime ISA

  • For those saving for a property, the Lifetime ISA (LISA) provides government bonuses for savers to get on the ladder.
  • Rather than being capped at £20,000, the LISA is capped at £4,000, however, this forms part of your £20,000 overall allowance.
  • For those who have already bought their first property, the LISA can be used as an additional retirement vehicle, but cannot be withdrawn until 60 years of age without penalties applying.
  • The LISA has an exit penalty if you’re withdrawing for any reason other than a first time purchase or before 60 years old. The only break of this rule is if one is terminally ill.
  • For each time you contribue into your LISA, the government will add 25%of your contribution.
  • A LISA can only be opened up to the age of 40 years old and if you contribute after you are 50 years old you will not receive the government bonus.
  • The LISA can be invested in either cash or stocks and shares.

Junior ISA

  • Act as long-term, tax-free savings accounts for children.
  • Your child must be under 18 and live in the UK.
  • If the child lives outside the UK, you must either be a Crown servant or the child depends on you for care.
  • You can’t have a Junior ISA as well as a Child Trust Fund.
  • The savings limit for Junior ISA for the 2018/2019 tax year is £4,260
  • You can invest into cash or stocks and shares.
  • Control of the account will be transferred to the child when they reach 16, but they can’t withdraw the money until they turn 18.

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