ISA stands for Individual Savings Account, a tax-free savings account. We take an introductory look at what ISAs are.
Basically an ISA provides you with a savings account, somehwere to invest your money that is protected from the taxman and as long as your money remains in an ISA you don’t have to pay any tax on it.
Currently there are 2 types of ISA: a stocks and shares ISA and a Cash ISA.
The minimum age for a Cash ISA is 16 and for the 2012/13 tax year you can put in up to £5,640.
Cash ISAs can be opened with as little as £1. There are fixed or variable rate cash ISA accounts and many offer bonus rates to attract new business.
Keep an eye on interest rates as it may pay to transfer your Cash ISA to another provider to get the best returns. If your do this make sure you transfer your ISA rather than close your original ISA and open a new one. As soon as you close your ISA account you lose the tax free status.
Stocks and Shares ISA
A Stocks and Shares ISA enables you to invest money in the stock market, in the shares of any company listed on a recognsided stock exchange, such as the London or New York Stock Exchanges.
Share ISAs offer protection from Capital Gains Tax (CGT).
All aged 18 or over can put up to £11,280 in a stocks and shares ISA for the 2012/13 tax year.
You can invest in both a Cash ISA and a Stocks and Shares ISA in the same tax year but the total amount you invest cannot exceed £11,280.
Be aware that whilst you can convert a Cash ISA into a Stocks and Shares ISA, you cannot do the reverse and convert a Stocks and Shares ISA into a Cash ISA.
If you use your ISA allowance up in one year and then make a withdrawal, you cannot reinvest the money back into an ISA in the same year. So for example if you put £11,280 into an ISA in June and then withdraw £3,000 in September, you can’t put any money back in during the same tax year.
Should you die, your ISA effectively dies with you. Any savings or investments you had in them become taxable from the date of your death and are included in your estate for inheritance tax purposes.