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LEARN TO ENJOY THE TAX BENEFITS OF ISAs
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LEARN TO ENJOY THE TAX ADVANTAGES OF ISAs
Individual savings accounts (ISAs) provide enormous tax advantages, that every investor must try to utilize in a portfolio. There are two main types of ISAs: mini-ISAs and maxi-ISAs. Every investor can choose between the two; mini-ISAs and maxi-ISAs cannot be combined in the same tax year.
There are three kinds of mini-ISAs, all of which can be used each year. They are cash mini-ISA, bond or share mini-ISA and insurance mini-ISA. A total of £7,000 can be invested in the three types of mini-ISAs every year: up to £3,000 in the cash mini-ISA, up to £3,000 in the share or bond mini-ISA, and the insurance mini-ISA has a limit of £1,000.
Interest payments on the cash mini-ISA is tax-free, and the money invested can be withdrawn at anytime without losing the tax advantage. However, amounts that are withdrawn within a particular tax year cannot be accepted back in the same year. For every investor, amounts that have matured in a tax exempt special savings account (TESSA), can be transferred into a TESSA only ISA account. This amount has a limit of £9,000, and the transfer can occur only once for every investor.
The bond or share ISA can take the form of investment in unit trusts, investment trusts, or an OEIC. Like the interest payments, coupon payments and dividends, are free of tax; there is no capital gains tax. The insurance ISA is normally based on insurance bonds. The three mini- ISAs, can be obtained from three different providers. These providers can be banks, building societies or other deposit takers.
An alternative to choosing the three mini-ISAs, is investing in a maxi-ISA to the tune of £7,000. A maxi-ISA involves an investment in bonds or shares, and are normally provided by investment trusts, unit trusts, or OEIC. Also up to £3,000 of the £7,000 can be kept as cash and £1,000 in the form of insurance bond. There is no switching facility between the various forms of assets in a maxi- ISA, and all the assets have to be obtained from the same provider in a particular tax year. Interests, coupon payments, dividends are free of tax, and there are no capital gains tax, just like in the mini-ISAs.
ISAs in general suit short-term horizon savings, and can provide a quick access to money, especially in the instant-access kind. This type of ISA will also be suitable to hold emergency funds, which everyone must do well to have. If someone is saving towards a holiday in the next six months, for example, it will be a good idea to keep the money in the form of an ISA, to ensure the money is received readily when needed. Unlike shares or bonds, the amount invested cannot lose its value. Although the value of the amount in an ISA is not reduced per se (a saving of £600 will still remain £600, before interest), the ‘real' value of the saving can plummet due to the effect of inflation. This risk can be taken care of by resulting to the use of index-linked ISAs. This type of ISAs, will pay interests in line with inflation.
It makes a lot of sense for every investor to find a place for ISAs in his portfolio. They are ideal tools for reaching short-term objectives, which I suppose every investor has or must have, for example, emergency funds or money to foot car repair bills. The savings on tax payments can go a long way to boost the returns of an investor.
David Opoku BA Hons. Accounting and Finance. (Currently specialising in Financial Advising/Stockbroking).
E-mail: davido312@aol.com Web: www.investmentyouneed.com
About the Author
David Opoku
davido312@aol.com
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