ISA's - The Basics
Since their introduction in April 1999, ISA's - Individual Savings Accounts - have become extremely popular because they are one of the most tax efficient investment products widely available to investors.
ISA's are a special Government approved tax shelter for personal savings and investments. An ISA is a tax efficient "wrapper" containing different kinds of qualifying investments, in just the same way as PEP's contain various types of qualifying stocks and shares, unit trusts and investment trusts. As with PEPs, the proceeds will be free of both income tax and capital gains tax, however, from 2004 ISA's will cease to be able to recover tax deducted from UK dividend income.
All ISA's are set up according to strict rules laid down by the Inland Revenue. These rules state, broadly, that ISA's can be made up of the following 3 components: Cash, Stocks and shares, and Life Assurance.
Cash.
The cash component may include bank or building society accounts and national savings products.
Stocks and Shares
The stocks and shares component may include unit trusts, investment trusts, OIEC's, company shares, gilts and corporate bonds.
Life Assurance
The life assurance component covers certain types of life assurance products and permits with profits investments.
You can contribute with a single or regular premium, although with the latter there is no contractual commitment to continue payments.
There will also be 3 types of ISA; Maxi, Mini and TESSA only.
Maxi
A maxi must contain the stocks and shares component and may contain either or both of the other components as well (i.e. cash and/or life assurance). For example it could contain only the stocks and shares component or stocks and shares plus cash or assurance. Equally it could contain all three components. A maxi ISA comes from a single provider.
Mini
A mini ISA is made up of just one component. Clients will be able to invest in up to three mini ISA's in one tax year providing they invest in only one of each component. Each component can come from a different provider if the client wishes.
TESSA
This is an ISA with a cash component only, where an investor may subscribe up to the amount deposited in a matured TESSA. A TESSA only ISA can be opened in the same tax year as a Maxi or Mini ISA. Limits
Maxi ISA.
The maximum total contribution to a maxi ISA is currently £7,000 per person in any one tax year. This could change in the future.
Mini ISA.
The maximum total contribution to a mini ISA per person in any one tax year is as follows:
Stocks and Shares component £3,000
Cash Component £3,000
Life Assurance component £1,000
Total £7,000
Thus the total amount for all 3 components of the mini ISA's (allowed per person in any one tax year) is £7,000.
About the Author:
Neil Mercer is a Consultant with STE Associates Ltd which is Regulated & Authorised by the Financial Services Authority. Check out his articles at www.neilmercer.co.uk
Individual Savings Accounts - The Rules & Basics
