ISA Guide

What is an ISA?

An ISA is an Independent Savings Account, which is essentially a tax efficient savings and investment product that was introduced by the Government back in April 1999 to replace Personal Equity Plans (PEPs) and Tax Exempt Special Savings Accounts (TESSAs).

The Basics of an ISA

Before we explain the different types of ISA we need to explain that an ISA is made up of one or two components, a “Stocks & Shares” component and a “Cash” component.

Stocks & Shares Component

A Stocks & Shares Component allows you to invest in shares listed on any recognized stock exchange, Bonds & Gilts, Unit Trusts, Investment Unit Trusts and Life Assurance. This investment component is ideal if you are looking at investing of a longer period, say 5 years or more and that you are prepared to accept the risks of investing in the financial markets. You will no doubt be familiar with the term “Your value of your investment may go up as well as down” and this is very much the case with this component of an ISA.

Cash Component

The Cash component allows you to invest your money in either, National Savings, Cash Unit Trusts UK and European Bank deposits and Building Society deposits. This component is ideal for those investors who want to protect the value of their investment and who may want to invest over the short term. So whilst the rewards may be lower than that of a Stocks & Shares, the cash component should be considered a tax efficient way of saving your hard earned money.

What different types of ISA are there?

There are two types of ISA’s, Maxi ISA and Mini ISA.

What is a Maxi ISA?

A Maxi ISA can contain two components – “Stocks & Shares” and “Cash”.

The Stocks and Shares component is mandatory and you may invest up to £7,200 in each financial year (April to April). The Cash component is optional and you may invest up to £3,600 in each financial year. However your total investment cannot be more than £7,200, so if you opted to include the Cash component, the maximum amount you could invest in the Stocks & Shares component would be reduced by the same amount.

i.e. If you invest the maximum £3,600 in the Cash Component, your maximum investment in the Stocks & Shares component is reduced to £4000.

Note: Once you have reached the maximum investment in any given financial year, you are not allowed to invest any additional sums, even if you have made a withdrawal from your ISA Account.

What is a Mini ISA?

A Mini ISA is like the name suggests a smaller version of the Maxi ISA.

The essential differences are that you can only invest in one component, “Stocks & Shares” or “Cash” and that the Stocks & Shares component is limited to a maximum investment of £4000 during the financial year.

Can I have a Mini ISA and a Maxi ISA?

Each tax year you can opt to have either a Mini ISA or a Maxi ISA. You cannot have both.

What is a Cash ISA, Mini Cash ISA or Maxi Cash ISA?

Essentially these all relate to same thing. A Cash ISA is the name given to the cash component on either a Mini ISA or a Maxi ISA. Likewise you may also hear the term “Mini Cash ISA” or “Maxi Cash ISA”.

What is a Stakeholder ISA?

A Stakeholder ISA must follow standards set by the Government and were introduced to provide investors with access to a low-cost and risk controlled savings product.

Who can open an ISA Account?

To invest in an ISA you must be 18 years old or over. However, if you are aged 16, you can open either a Mini Cash ISA or the cash component of a Maxi ISA. In all cases you must be a UK resident for tax purposes.

How much can I Invest in an ISA?

Type of ISA or ISA Component	Mini ISA’s – you can have up to two per financial year	or one Maxi ISA
Cash	Up to £3,600	Up to £3,600
Stocks & Shares	Up to £4000	Up to £7,200 less any amount you have invested in the Cash component

How long will ISA’s be around for?

At present you can continue to invest in ISA’s each financial year up until April 5th 2010.

The Tax Saving Part

You can withdraw your money from an ISA at any time and any such amounts will not be subject to Capital Gains Tax (CGT). Any interest or interest distributions from investments and accounts in an ISA are tax free.

Note: You are not required to declare your income or gains from your ISA on your annual Tax Return.

What if I move abroad?

If you have an ISA and then subsequently move abroad, you do not have to cash in your ISA Investment and you will continue to receive tax relief on your gains.