ISAs: START EARLY AND TAKE ADVICE
Have you forgotten ISAs, now the end of the tax year has passed?
Statistics from the Investment Association regularly show that ISA sales are clustered in the early months of the calendar year as investors react to a 5 April deadline. Look at the personal finance pages of the weekend press in March and it is hard to avoid all the ISA stories, including the journalist’s favourite of ISA millionaires (they do exist). However, by mid-April ISAs seemingly go into hibernation. The puzzle is why that happens.
ISAs offer some important tax benefits and, logically, to maximise their use, investment should be made at the start of the tax year, rather than its end. As a reminder:
ISAs are free of UK income tax on dividends and interest;
There is no UK capital gains tax on any profits within an ISA;
There is nothing to report on a self-assessment tax return; and
The tax benefits of an ISA can effectively be transferred to a surviving spouse or civil partner.
Recent statistics issued by HMRC revealed that in 2017/18, 72% of ISA subscriptions were made to cash ISAs. While the cash ISA does have a role, you should give serious thought before using your ISA subscription to go down this route:
Interest rates on offer are low. At the time of writing, only fixed term ISAs with terms of three years or more offered an interest rate above 2.0%.
Over the years, many variable rate ISAs have moved from having relatively competitive rates to minimal rates as providers have launched new accounts to attract fresh money. Just because an account was called ‘gold’ does not mean it is not now closer to rusty iron.
The personal savings allowance of up to £1,000 means that you may not need to use an ISA to earn tax-free interest.
Those low interest rates (CPI annual inflation was running at 1.9% in March 2019) have encouraged some investors to choose ‘innovative finance’ ISAs, which advertise higher returns. These are not cash ISAs and are outside the protection of the Financial Services Compensation Scheme. At the turn of the year one of the providers of such ISAs, which had been promoting 8% returns, went into administration. Subsequently HMRC decided that what had been marketed did not even meet ISA requirements, leaving investors not only with a capital loss, but also a potential tax bill.
If you are planning to make an ISA investment in 2019/20, consider doing it now, rather than waiting for the March stampede.
Call us today to discuss your ISA options and also to review your existing ISAs. What made sense a few years ago as an ISA strategy may not do so now.
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