ISA Guide

Most savings accounts and investments are taxed - so the government gets some of your interest, or investment growth. Individual Savings Accounts (ISAs) are different, because you don’t pay tax on the interest on savings - or the capital gains on investments.

There is a limit on the amount you can invest into an ISA each financial year, which is set by the Government. Once you have reached this you are not allowed to invest any additional sums, even if you have made a withdrawal from your ISA Account.

If you are aged 16 or 17, you can have a cash ISA. Once you become 18 you can also apply to open a stocks and shares ISA. You have to be resident and ordinarily resident in the UK for tax purposes, or a Crown employee, such as a diplomat or a member of the armed forces, who is working overseas and paid by the Government. The spouse, or civil partner, of one of these people can also open an ISA.

No more minis and maxis

You may have heard the term mini and maxi ISA. These no longer exist. There are now just two types of ISAs: Cash ISAs and Stocks and Shares ISAs.

There are two types of ISAs

• A Cash ISA – where you deposit savings or
• A Stocks & Shares ISA – where you hold investments

Cash ISAs
Cash ISAs are just like a deposit account. Your capital will be returned and additionally the interest payable is exempt from UK tax. You can invest in instant access accounts or fixed term.

Stocks & Shares ISAs
Stocks and Shares ISAs allow you to take higher risks. Stock market investments can fall in value as well as rise, so you could get back less than you invest. However over the longer term funds and shares have the potential to produce higher returns

How much you can invest
You can invest in both a Cash and Stocks & Shares ISA up to annual limit set by the government, currently £10,200.

You can either:

• invest the entire amount in a stocks and shares ISA or
• invest up to £5,100 in a cash ISA with the remainder being saved in a stocks and shares ISA.

A Cash ISA is a lot like a savings account - except you don't pay any tax on your interest.

This makes a real difference to your savings, helping your money to grow.

How much can you save?
In the current tax year, you can put a maximum of £5,100 into a cash ISA.

Moving your cash ISA
If you have a cash ISA with another bank or building society, you can transfer this to a cash or stocks and shares ISA with another company. By transferring the funds, you keep all the tax benefits.

However, if you withdraw money from a cash ISA, you lose the tax benefits on the funds you've withdrawn. The only way you could then reinvest into a cash ISA is to take advantage of the ISA allowance that you haven't used.

There are two types of Stocks & Shares ISAs:

• A Managed or
• A Self-Select ISA – where you choose what shares to buy

Tax efficient
When you invest via a Stocks & Shares ISA any capital gains you make on investments held within the ISA are free from Capital Gains Tax (CGT).

With the current CGT annual allowance standing at £10,100, you might not be too worried about breaching it. But if you're going to be investing over several years, you may well find that at some point in the future you are very glad of that CGT exemption.

You pay no additional tax on any of the income you receive from your ISA savings and investments. This includes dividends, interest and bonuses.

Tax reliefs referred to in respect of Cash ISAs and Stocks and Shares ISAs are those applying under current UK legislation, which may change. The availability and value of any tax reliefs will depend on your individual circumstances.

Managed vs Self-Select
When many people think of a Stocks and Shares ISA they think of what is actually a Managed ISA. But there are actually two types of Stocks and Shares ISAs: a Managed ISA (where a Fund Manager chooses the shares and packages them up as a Fund) or a Self-Select ISA (where the individual chooses what shares to buy or sell).

A range of investments
Stocks and shares ISAs in general, can include:

• shares and corporate bonds issued by companies officially listed on a recognised stock exchange anywhere in the world.
• gilt edged securities ('gilts'), issued by the UK government, similar securities issued by governments of other countries in the European Economic Area and ‘strips’ of all these securities
• units or shares in funds authorised by the Financial Services Authority (unit trusts or Open Ended Investment Companies (OEICs))
• units or shares in non-UCITS retail schemes authorised by the Financial Services Authority for sale to retail investors in the UK
• shares and securities in investment trusts
• units or shares in Undertakings for Collective Investment in Transferable Securities (UCITS) funds based elsewhere in the European Union (these are similar to unit trusts and OEICs authorised by the Financial Services Authority)
• any shares which have been transferred from an HMRC approved SAYE share option scheme or Share Incentive Plan
• life insurance policies
• stakeholder medium-term products

Things to consider
There are a wide range of Stocks & Shares ISA providers, from banks to fund managers. When choosing which to buy you should consider the performance, the risks, the running charges, your investment objectives and the range of products you want to be able to choose from.

With a Self-Select ISA you choose what to buy. You fund your ISA with either cash or existing shares and then you can buy and sell shares with the funds held within the ISA wrapper.

You can invest in Shares listed on any recognized stock exchange, Funds, Bonds & Gilts, Unit Trusts, Investment Unit Trusts and Life Assurance.

You can also invest in investment trusts, exchange-traded funds (ETFs) and basically any stock traded on what HM Revenue & Customs deem 'Recognised Markets'. For more information on what you can invest in visit www.hmrc.gov.uk

You can withdraw funds from your Self Select ISA as you wish, although once the funds are removed any subsequent capital growth is no longer exempt from Capital Gains Tax.

When considering a Self Select ISA you should check and bear in mind the following:

• The costs you will be charged for each Trade you make
• What you will able to buy - this will vary from providers. Although there are a range of options, not all providers will have the functionality to allow you to trade in all investments
• Your investments are not guaranteed – the value of your investments might fall as well as rise and you may not get back what you originally invested

In simple terms, a managed ISA is a Pooled Investment in an ISA wrapper.

A Pooled Investment is where you pool your money with lots of other investors and a fund manager picks the actual shares or bonds bought.

Whereas with a Self-Select ISA you choose what shares you buy and sell, with a Managed ISA, a Fund Manager chooses the shares, packages them together and then sells them as an ISA.

A Fund Manager will pick a selection of shares usually around a specific theme such as geography, industry and/or company scale for example. They group the shares together and package it up. E.g. A South East Asia Fund

Investors can invest an amount of their choosing, up to their ISA limit, and they gain, in essence, a share of the entire fund or pooled investment. This means that they will share any gains or losses with other people who have invested in the ISA fund and they gain the tax advanatages of an ISA.

Managed ISAs usually have charges, sometimes an initial charge and an annual management fee, and of course you aren’t choosing what shares are bought and sold within the fund.

Some providers may only offer their own products, or a select choice of funds from a range of providers.

All funds have objectives and ratings to give investors an idea of the type of fund it is. You can find these in major financial publications or directly from the fund managers.

If you have been saving in an employee share scheme which is coming to an end and you intend to hold onto the shares, you can roll them over into a Stocks and Shares ISA within 90 days of the scheme maturing, subject to the terms and conditions of that ISA. Doing this will mean you don't have to pay Capital Gains Tax on any profits you've made, either to date or in the future as long as they remain in the ISA.

If you already have an ISA from either this or previous tax years you can transfer it to another manager. In the same way you could move your bank account to a different bank.

However, where with a normal savings account you might close one account, get your money and then open a new account and deposit your money. With an ISA you cannot close the first ISA and pay the money into a new ISA. Instead, they must ask the new ISA manager to arrange the transfer. The old manager may charge for making the transfer - check the terms and conditions to find out.

Subscriptions to a stocks and shares ISA can only be transferred to another stocks and shares ISA. However, subscriptions to a cash ISA can be transferred to another cash ISA, or to a stocks and shares ISA.

You can get an ISA by going to an ISA manager. These include:

• banks and building societies
• National Savings and Investments
• financial advisers
• some supermarkets and retailers

For more information on ISAs contact HRMC (www.hmrc.gov.uk) or an Independent Financial Adviser.

ISA stands for Individual Savings Account.

There are two types of ISA: a Cash ISA and a Stocks & Shares ISA.

You can invest in both types of ISA each tax year up to the limits set by the Government.

One of the main advantages of an ISA is the tax breaks they offer.

Stocks & Shares ISAs offer the potential of healthy returns and tax breaks. You do not pay tax on the income you receive from your ISA or on any capital gain you may make.

With a Cash ISA, all interest earned is free of any tax.

Like any stock market investment, the value of a Stocks & Shares ISA can fall as well as rise.

Cash ISAs are far less risky. Under the Financial Services Compensation Scheme the first £50,000 of your investment is protected. However, don’t expect exciting returns, even with the tax-free interest.

There is a limit on the amount you can pay into an ISA account each tax year. And, if you don’t use it, you’ll lose it.