Happy Birthday ISA!
This year marks the 20-year anniversary of the Individual Savings Account (ISA). An ISA is a scheme allowing individuals to hold cash, shares, and unit trusts free of tax on dividends, interest, and capital gains. In 1999 it replaced both personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs). Most people have a general awareness of cash ISAs and stocks and shares ISAs but it is worth considering some of the other types of ISA too.
The launch of Help to Buy ISA and The Lifetime ISA (LISA) both offer a valuable government bonus if certain conditions are met. Help to Buy ISAs are available for anyone over 16 looking to save towards their first home. You can save £1,200 in the first month plus £200 per month thereafter. The government will give a bonus of 25% up to £3,000. This can only be used for a mortgage deposit or completion on a property valued up to £250,000 (£450,000 in London).
It is worth noting that to receive the bonus, when you are close to buying your first home, you will need to instruct your solicitor or conveyancer to apply for your government bonus. Once they receive the government bonus, it will be added to the money you are putting towards your first home. The bonus must be included with the funds consolidated at the completion of the property transaction. The bonus cannot be used for the deposit due at the exchange of contracts, to pay for solicitor’s, estate agent’s fees or any other indirect costs associated with buying a home.
The LISA is for anyone aged 18 to 39. £4,000 p.a. can be paid up to age 50. The government will pay a 25% bonus (up to £1,000 per annum) and this can be invested in either cash or stocks and shares. If you withdraw from the LISA before you are 60, unless it is to buy your first home or you are terminally ill, you will face a hefty penalty of 25% of the value, including any growth.
In addition to the Help to buy and LISA that benefit from government bonus, recent changes also now allow a widow or widower to apply for an Additional Permitted Subscription (APS) on the death of their spouse (also applies to civil partners). This means that the survivor will receive an additional ISA allowance (the APS) equal to the value of their spouses/civil partners ISA fund at date of death. There are also Junior ISAs (JISAs) that offer an opportunity for tax free savings for children of up to £4,000 per annum.
In conclusion, the tax efficiency of ISAs makes them an essential part of any portfolio. They can help at all phases of life. JISAs for the young for University or travel, Help to Buy for those getting on to the property ladder, LISA for the same and for those looking to supplement their retirement savings. ISAs offer real planning opportunities to generate tax free income in retirement, after pensions they are the most tax efficient investment around. So Happy Birthday ISA, here’s to the next 20 years!