Cashing in on flexible ISAs
In his 2015 Budget, the Chancellor tried to put some much needed life back into cash ISAs with a substantial uplift to the investment limit.
The number of people subscribing to cash ISAs in 2013/14 had fallen to less than 10.5 million from a high of 12.2 million. But the tax-free personal savings allowance announced in this year’s Budget statement could actually make cash ISAs redundant for many savers from April 2016 if it is enacted.
The proposal is that annual savings income up to £1,000 will be exempt for basic rate taxpayers, with £500 exempt for higher rate taxpayers.
Savings rates are currently just over 2%, so in theory basic rate taxpayers would need around £45,000 invested before they would have to worry about an account’s tax status. Higher and additional rate taxpayers should still find cash ISAs valuable, as will anyone aiming to build up substantial long-term savings.
As something of a counterbalance, from this autumn the cash ISA investment limit is to become much more flexible. Currently, if you invest the limit of £15,240 and then withdraw it, no further investment is permitted during the same tax year. This restriction will go, allowing you to replace the money in your cash ISA without it counting towards your annual ISA limit, so long as the repayment is made in the same tax year as the withdrawal.
There is one group of savers who will definitely want to use cash ISAs – first time home buyers. A help-to-buy cash ISA is planned for the autumn, with the key selling point being a 25% tax-free bonus paid by the government on both the amount invested and the accumulated interest. The bonus will be paid when the savings are used to purchase a home for up to £450,000 in London, or £250,000 elsewhere.
A maximum bonus of £3,000 will be available when the individual’s ISA savings reach £12,000, although a couple buying together can both qualify.
Some £30,000 could therefore be available towards a deposit. The initial investment will be limited to £1,000, with a maximum monthly saving of £200 thereafter. So given current interest rates, it will take about four and a half years to build up the savings necessary to qualify for the maximum bonus. If you are planning to help your son or daughter save for a deposit, the help-to-buy ISA should be an attractive proposition. It will not be possible to have a normal cash ISA at the same time, but the personal savings allowance will compensate.
New qualifying investments
This summer should also see the range of qualifying investments for a stocks and shares ISA extended to include listed bonds issued by co-operative and community benefit societies, as well as traded small and medium-sized enterprise securities. Many investors have turned to peer-to-peer lending in search of better returns. Although more risk is involved, returns of 5% or 6% may be available for longer term savings. There were hopes that peer-to-peer lending would by now be included within the ISA wrapper, but no firm introduction date has yet been set – it may well be that a new style ISA is needed. However, a few innovative peer-to-peer products qualifying for inclusion within a stocks and shares ISA have already been launched.
Although none of these changes are definite, it is now finally possible to transfer the savings in a child trust fund to a junior ISA. Better interest rates, lower fund charges, and automatic transfer into a normal ISA at age 18 are all good reasons to do so.
Contact us today to discuss how the summer budget may affect you:
020 7376 9333
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– The Junior ISA– a tax efficient way to save for your children’s future
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