What is an ISA
ISAs
An ISA is not an investment; it is a wrapper which allows lots of different investments to be held
within it. There are a range of different types of ISAs; with Cash ISAs and Stocks & Shares ISAs being by far the most common:
- Cash ISA – Is effectively the same as a standard savings account apart from there is no tax to
pay on the interest paid. - Stocks & Shares (S&S) ISA – Is an investment account in which a range of securities and
investments can be held. There is no tax paid on distributions or gains on these investments.
For a full list of eligible investments please see page 297 of the R02 study text. - Innovative Finance ISA (IFISA) – Allows individuals to lend ISA funds in the Peer-to- Peer
lending market – unlikely to come up in R02. - Lifetime ISA (LISA) – A new product which gives individuals bonuses towards buying a first
home or retirement – unlikely to come up in R02.
Who can invest using an ISA?
An ISA investor must be an individual who is:
- Resident in the UK for tax purposes;
- A Crown employee, such as a diplomat or member of the armed forces who is
working overseas and paid by the government: - Spouses and civil partners of such individuals are also eligible to subscribe;
- Aged 18 or over to invest in a stocks and shares ISA; and
- Aged 16 or over to invest in a cash ISA. However, if the capital is derived from a parent, and the interest together with any other income from all capital provided by the parent is more than £100 a year, the income will be treated as the income of the parent until the child reaches age 18, and the income must be reported on the tax return of the parent, and may not therefore be tax free.
- The current annual allowance limit is £20,000 per person, although the maximum that can be saved in a Lifetime ISA is £4000 in a tax year.
• This can be invested in a Cash ISA or S&S ISA, but in total it cannot be more than the
allowance.
• ISAs are tax free.
• Interest, dividends and property income distributions from ISA investments are tax free.
• All interest earned in the cash ISA is credited gross.
• Property income distributions from REITs are paid gross to ISA managers. Capital gains on
ISA investments are exempt from CGT although losses cannot be allowed against gains made
elsewhere.
• It is possible to transfer money within a Cash ISA to a S&S ISA and vice versa.
Questions - Use Your Note Taker To Jot Down Ideas / Calculations
Questions on ISAs are very common in R02 so it is important to fully understand annual allowances
and who is eligible to invest.
1. The Smith family comprises Mr and Mrs Smith and their three children aged 18, 16 and 13. Excluding
Junior ISAs, what is the MAXIMUM that can be invested by the family in cash-based Individual
Savings Accounts (ISAs) in 2017/18?
a) £40,000.
b) £60,000.
c) £80,000.
d) £38,100.
C)
Adult cash ISAs are available to anyone over the age of 16 and the allowance is £20,000. The only member of the family that can’t hold an adult based cash ISA is the 13 year old, the four others can. So simply multiply £20,000 by 4 = £80,000.
2. Janice is a basic rate taxpayer with numerous National Savings and Investments products. All of these result in a tax liability for her, APART from her:
a) Income Bonds.
b) Direct Saver Account.
c) Direct Individual Savings Account.
d) Investment Account.
C)
The basic characteristic of Individual savings accounts (ISAs) is that they are tax free.
3. Janet is 18 and invested £5,000 in a stocks and shares Individual Savings Account (ISA) on 5 June
2017. How much more can she invest in a cash based ISA on 8 August 2017?
a) £0.
b) £15,000.
c) £20,000.
d) £10,000.
B)
The maximum that can be invested into ISAs in 2017/18 is £20,000 – this can be split between cash
and stocks & shares.
4. Claire invested £3,000 into her stocks and shares Individual Savings Account (ISA) on 8 June 2017. On 1 August 2017 she wishes to maximise her allowance by topping up with cash. She will be able to
invest a further:
a) £17,000.
b) £0.
c) £20,000.
d) £10,000.
A)
The maximum that can be invested into ISAs in 2017/18 is £20,000 – this can be split between cash
and stocks & shares.
5. Which of Martina’s clients is INELIGIBLE to invest in an Individual Savings Account (ISA)?
a) Adam, a British army officer serving overseas.
b) Mitchell, a 17-year old UK resident.
c) Jessica, a retired British National resident in Spain.
d) Hugo, a retired Australian National permanently resident in the UK.
C)
You must be resident in the UK in order to invest in an ISA – the exception to this is crown
employees such as diplomats and armed forces who are serving abroad.
6.Jack and his wife Sophie both invested £10,000 in ISAs in July 2017, and then Jack died two months
later. How much more will Sophie be permitted to add to her ISA in the tax year 2017/18?
a) £20,000.
b) £10,000.
c) £30,000.
d) £40,000.
A)
If your spouse dies you inherit the right to their existing ISA investments rather than the ISA itself. So
in this example Jack has invested £10,000 at the time of his death so Sophie inherits the right to
invest a further £10,000 into ISAs for herself. So the £10,000 from Jack is taken and added to
Sophie’s remaining £10,000 ISA allowance giving her a remaining allowance of £20,000.
- Further study text reading: Pages 294-302