Sheltering investments within an ISA offers numerous benefits for investors, many of which are well known and accepted. Capital gains are tax free and income is free from additional taxation, making them an attractive investment vehicle. Since the last tax year the maximum subscription has increased by almost one third to £20,000 allowing investors to save substantially more within this tax free structure. Since 2016/17 there is also increased flexibility and it is one element of this flexibility that I intend to highlight in this blog.
If there has been a capital or income withdrawal from an ISA, it is now possible to return this money to the ISA in the same tax year without impacting the annual subscription. To illustrate, here are a couple of examples for an investor with an ISA worth £200,000:
The investor makes a full ISA subscription of £20,000. Later in the same tax year the investor then withdraws £100,000 from the ISA. At any future point in the same tax year, the investor would be able to return the sum of £100,000 to the ISA even though there has already been a full subscription.
The investor makes a partial ISA subscription of £10,000. The investor then withdraws £100,000. The investor can return £100,000 to the ISA and can subscribe the remaining £10,000.
There are some important things to remember. One point is that money has to be returned to the same ISA as it was withdrawn. Another point is that the money must be returned in the same tax year for flexible ISA rules to apply.
If an investor wants to access a large sum of capital for a short time period without realising capital gains by selling investments in a taxable portfolio, this ISA flexibility is attractive. This might be to provide bridge financing for a property purchase or to help with cash flow timing. Similarly, if income is withdrawn during the tax year and then circumstances change and there is scope to replenish the ISA then this can be arranged. Taking advantage of this flexibility helps maximise the scale of the ISA as much as possible. Taking the investor with an ISA worth £200,000 as an example:
Income from the ISA is distributed quarterly and in the current tax year totals £5,000. The investor then has an unexpected windfall and can afford to invest the monies. The sum of £5,000 can be returned to the ISA to replenish the income that has been distributed.
The end of the tax year is in clear sight. If you have withdrawn capital or income from your S&J ISA and you would like to replace this, now is the time to act. Your investment manager will be able to advise on how this can be arranged.
Senior Investment Manager
20 March 2018