ISA surprises:The 18 year old Individual Savings Account is growing up fast
More rapidly and thoroughly than many in the industry foresaw, the long term savings and investment landscape is being transformed by the ISA. Many Speirs & Jeffrey clients have utilised this vehicle’s increasing attraction as a store of wealth, more so than ever following the enhancements of recent years.
Since the introduction of the Individual Savings Account 18 years ago, the clear direction of travel has been to restrict benefits to pension investors while promoting the ISA as a principal savings vehicle. Given the requirement to maximise tax receipts now and balance the books, HM Treasury has deployed both carrot and stick to drive investment into ISAs. It has improved tax incentives for ISA holders at an aggressive pace, whilst bearing down on the tax-exempt contributions of larger pension holders by constraining lifetime tax-free allowances. Portfolio holders meanwhile have been hit by the introduction of a dividend allowance, now to be reduced to £2,000 from 6 April 2018. This has introduced tax liabilities and necessitated tax returns for those who had previously not been required to complete them, often making it worthwhile to migrate funds to an ISA as fast as the £20,000 annual allowance permits.
Meanwhile for additional rate tax payers or others with large pension pots whose contributions are constrained by the new £1m lifetime allowance, ISAs are featuring more and more in their financial planning.
By stepping up the pace of enhancements to the ISA regime, the Government is signalling a desire to see less earned income escape its tax net via pension investment, and offer a secondary route to savers seeking long-term growth of taxed income free from capital gains tax.
Speirs & Jeffrey has been opening more ISA accounts for clients with every passing year, as our investors respond to the increasing tax advantages that ISAs offer, especially now that the annual tax-free savings allowance has nearly doubled from £10,200 in 2010/11 to £20,000 in 2017/18. Some of the benefits are obvious in the here-and-now, not least the flexibility to withdraw funds from ISAs tax free and spend it or give it away as desired. Others become evident when anticipating future changes in circumstances, making full exploitation of that annual use-it-or-lose it £20,000 allowance advisable, even when not necessitated by current circumstances. Those anticipated future changes can be positive, for example with the certain future receipt of a substantial inheritance making pre-loading of the ISA a sensible preparation. Or they can be less cheerful (but more inevitable) such as a couple thinking ahead to the eventual death of one or other spouse.
The Chancellor has relaxed rules on the proportions of an ISA that can be cash, as opposed to investments, as it seeks to draw in bank and building society savings, and just as importantly, to permit switching between cash and stocks within the ISA wrapper. This two-way traffic has obvious benefits. In a low interest rate environment, converting cash to investments can makes sense, whilst the opposite may apply when interest rates climb, or when older savers find their appetite for higher risk investment diminishing. Flexibility also extends to withdrawals and resubscriptions within the same tax year, without loss of benefits, giving ready access to large sums in circumstances – property purchases for example –where time is of the essence. Another recent enhancement of the ISA regime is the inclusion of AIM-listed shares as permitted holdings, opening up possibilities for inheritance tax planning.
Finally, a more recent (2017-18) and powerful enhancement of the offering, and a good example of how the new ISA regime rewards long-term and lateral thinking, has been the facility allowing a married couple to see the value of their spouse’s ISA retained after their death through an 'additional permitted subscription’ (APS) process. Although there are rules surrounding the time period for the transfer, and specialist advice should be sought, the outcome of this additional enhancement of ISA flexibility is that the survivor inherits the value of the tax-free savings, without losing the ability to make their own ISA contribution during the same tax year. Will the ISA continue to develop so attractively? This cannot of course be guaranteed, so caution is advisable. If it did however, enhancements to look out for might include the ability to gift part of an ISA to a relation, or the acquisition of IHT benefit. Perhaps the ISA subscription allowance might continue to grow, while the pension allowance might shrink further.
Speirs & Jeffrey strongly recommends that clients acquaint themselves with all of the advantages - obvious and not-so-obvious - that today’s ISA regime now has to offer, whilst reminding clients that current tax levels and relief may change and the value of any relief depends on individual circumstances.
Speirs & Jeffrey
8 August 2017