An ISA is a tax-favoured savings account introduced on 6th April 1999. The Treasury has confirmed that ISAs will remain intact until at least 2010 and should therefore be considered a valuable investment option. ISAs replaced PEPs and TESSAs. ISAs are not considered an an investment. They are a tax-free tool that allows you to shelter investments.
Terms of an ISA:
- If you live in the UK and are over the age of 18, you can invest a maximum of £7,000 per year in each tax year. 16 and 17 year olds can also participate and can invest up to £3,000 in a mini cash ISA.
- You can either invest in equity or cash. There are strict limits on how much you can put in each ISA. The limits depend, in part, on which ISA you use and vary depending on if you use a maxi ISA or a number of mini ISAs.
- In the past, ISAs benefited from a 10% tax credit on UK equities; however, this stopped on 5th April 2004. The allowable stock and share investments in an ISA include open ended investment companies (OEICs), investment trusts, unit trusts, fixed interest corporate bonds, ordinary shares, and preference shares.
- A PEP that was formed prior to 6th April 1999 may continue to be held outside an ISA, with the same tax advantages. If you had a TESSA prior to 6th April 1999, you are allowed to run the TESSA for its full five year term.
- Income from ISA investments is tax free. You do not have to report it on your tax return. Capital gains are also exempt from CGT.
- ISA plans are sold by IFAs, stockbrokers, banks, fund managers and other financial institutions that have the proper authorisation. You can buy a pre-defined plan or you can have a 'self-select' ISA and make your own decisions on what to put in it.