Learn About ISAs

What is an ISA?

Individual Savings Accounts (ISAs) are a form of tax-free shelter or 'wrapper' that replaced Personal Equity Plans (PEPs) and Tax Exempt Special Savings Accounts (TESSAs) in April 1999. Both PEPs and TESSAs remained in force until April 2008, but no new subscriptions could be made to PEPs. Subscriptions could continue to TESSAs up to the normal limits, but reinvestment at maturity had to be to a TESSA Only ISA. From April 2008 all PEPs were reclassified as Stocks and Shares ISAs, and TESSA Only ISAs were reclassified as cash ISAs.

Investments held within ISAs are exempt from Income Tax and Capital Gains Tax. The income or gains received from ISAs does not need to be declared to HMRC.

There is a limit on the amount you can invest each year (see Investment Limits).

There is no minimum holding period for an ISA to retain its tax exempt status. However, you should ask any ISA manager if their product includes penalties or additional charges for early withdrawal, and whether you need to leave your money invested for a minimum period in order to qualify for the best rates, any bonuses or guarantees.

There are two different kinds of ISAs, Cash and Stocks & Shares (see Different Types). It is important that you understand the consequences of investing in the different types of ISA as investing just £1 in the wrong type will limit your overall allowances and investment choices.

Investment Limits

There are restrictions on how much can be subscribed into each ISA type in any tax year and these are shown in the table below.

ISA Component	Investment Limit
Stocks & Shares	£10,680 total, less any amount contributed into the cash component
Cash	£5,340

Some ISA providers may set their own limits on their investments. For example, some may only permit the full £10,200 to be invested into a Stocks and Shares ISA. Furthermore, not all ISA providers will offer the different components.

Who can Invest?

To invest in an Individual Savings Account you must:

• Be resident and ordinarily resident in the United Kingdom for tax purposes. Or, if not so resident, perform duties which, by virtue of section 132 (4)(a) of the Income and Corporation Taxes Act 1998 (Crown employees serving overseas), are treated as being performed in the United Kingdom, or be married to a person who performs such duties.
• Be 18 years of age or over (16 years or over for a Cash ISA).

Different Types

There are two different kinds of ISAs. These are:

• Stocks and Shares ISAs

  This component can be invested in collective investments such as Unit Trusts, Investment Trusts, shares listed on a recognised stock exchange, or bonds and gilts (which are not redeemable within five years from the date of purchase). Cash can also be held within the Investment Component but only pending future investment in any of the above. Interest on cash held in the stocks and shares component will be subject to a flat 20% tax charge.

• Cash ISAs

  This component can be invested in building society deposits, UK or European authorised bank deposits, cash unit trusts or National Savings.

  TESSA Only ISAs (TOISAs) were a special low risk ISA which offered a continued tax shelter for the capital element of maturing TESSAs (Tax Exempt Special Savings Accounts). These have been reclassified as Cash ISAs from April 6th 2008.

ISA Transfer

If you are unhappy in any way with an ISA held with a provider, you can easily transfer it to another provider.

All you need to do is complete a form, which the new provider will supply.

They will then arrange for the transfer to take place.

Your existing ISA manager can't stop you transferring, but they may make you pay a charge, or insist that you sell any existing ISA investments and transfer cash (this will be specified in the 'ISA Terms & Conditions').

From April 6th 2008 you are able to transfer Cash ISA investments to Stocks & Shares ISAs as long as the specific investment provider allows such a transfer.

If you want to transfer the money you have put into your ISA in the current year, you must transfer all of it. If you do this, any more money you want to put in within the current year must go into the new ISA.

You can also transfer some or all of the money you put into your ISA in earlier years. Some managers may not allow you to transfer part of your ISA. Your existing ISA manager will be able to tell you how much you can transfer.

Transferring an ISA will not affect the amount you can contribute in total in the current year.

TESSA Only ISAs

TESSA Only ISAs were a special low risk ISA which offered a continued tax shelter for the capital element of a maturing TESSA (Tax Exempt Special Savings Account).

TESSA Only ISAs have been reclassified as Cash ISAs from April 6th 2008.

CAT Standards

The government has introduced some standards for ISAs to help investors choose their investments. CAT stands for Cost, Access and Terms. There are different CAT standards for each component of the ISA and there is no requirement for every ISA to meet the standards.

The key features document issued to investors should clearly state whether or not an ISA has met the CAT Standards. Meeting the standards is not an indication that a particular investment will be good or bad, but simply that it has a certain level of charges and access, and a low minimum investment.

Cat Standards are:-

• NOT a Government endorsement of a product.
• NOT a guarantee.
• NOT an indication of a superior product - a Cat Standard product may do better or worse than a non-CAT Standard product.
• NOT necessarily an indication of good investment performance - many of the best performing and most popular funds may not be to CAT Standard.
• NOT a specific recommendation that a product is right for you.
• NOT a substitute for advice from a qualified adviser.