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The ISA Turns 25

Gresham Wealth

In 1999, the Individual Savings Account (ISA) was introduced in the UK, revolutionising the way people save and invest. Now, 25 years later, the ISA remains a popular investment vehicle. In this blog post, we will explore ISAs in more detail and discuss why you should consider using an ISA for your savings and investments.

1. New rules for 2024

From 6 April 2024, it will be possible for investors to make multiple subscriptions to the same type of ISA (i.e., Cash ISAs or Stocks & Shares ISAs) in one tax year, providing they stay within their annual limit which is currently £20,000 per person. This means that investors can spread their investments over different ISA providers if they wish.

Whilst this might be a good idea for some, it is also worth bearing in mind that it can be easier and cheaper to keep your investments in one place.

Other new rules, which allow for partial transfers of current tax year ISAs, will also come into place from April 2024.

2. Tax-Free Savings

One of the most attractive features of the ISA is its tax-free status. Any savings interest, income or capital gains earned within an ISA are exempt from both income tax and capital gains tax. This means that you can grow your wealth without worrying about being taxed on your returns. With the Dividend Allowance and Capital Gains Tax (CGT) annual exemptions due to halve (to £500 and £3,000 respectively) from 6 April 2024, the continuing tax-free status of ISAs makes them even more attractive.

3. Flexibility and Choice

The ISA offers a range of investment options, allowing you to tailor your portfolio to your specific needs and risk tolerance. You can choose from various investment vehicles via a Stocks & Shares ISA, such as direct equity shares, funds, and bonds, or opt for a Cash ISA with a fixed interest rate. This flexibility allows you to diversify your investments and choose your own risk profile. Additionally, you can switch between different investment options or withdraw your money at any time, giving you the freedom to adjust your investment strategy as needed.

4. Contribution Limits

ISAs come with generous contribution limits, making them a useful tool for building long-term wealth. The current annual allowance for those aged 18 and over is £20,000.

Children under age 18 have a £9,000 allowance via a Junior ISA (JISA). As of 6 April 2024, the current loophole, which previously allowed 16 and 17-year-olds to hold both a £20,000 Cash ISA and a £9,000 JISA, will close. Going forward, those aged 16 and 17 will be limited to the lower JISA allowance of £9,000 until they turn 18 and qualify for a full adult ISA.

Lifetime ISAs (LISAs) are designed to help people aged between 18 and 40 save up for their first home, or retirement. A LISA lets you save up to £4,000 per year and the Government will top up your ISA with a 25% bonus , up to a maximum of £1,000 per year, until the age of 50. Any money you put into a LISA will be included as part of your annual ISA contribution limit. Tax-free funds, including the government bonus, can then be used to help buy a first home worth up to £450,000 at any time from 12 months after first saving into the account. Funds, including the government bonus, can be withdrawn from the LISA from age 60, tax-free, for any purpose.

These generous limits mean it is possible to save a decent amount each year and potentially accumulate a significant nest egg over the longer term.

5. Inheritance Tax Planning

ISAs also offer inheritance tax benefits for married couples and civil partners on first death, as if you leave an ISA to your spouse or civil partner, it can pass tax-free. This can be particularly beneficial if you have a large estate and want to minimise inheritance tax. However, on second death when the recipient of the ISA dies and passes their estate on to their beneficiaries, the ISA would then be liable to inheritance tax.

ISAs offer a range of benefits that make them a compelling investment option. From tax-free savings to flexibility in investment choices, the ISA can help you reach your financial goals.

To discuss how best to utilise ISAs as part of your overall financial plan, please get in touch with us.

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