ISAs and PEPs
Individual Savings Accounts (ISAs)
Some important changes apply to ISAs from 6 April 2008. ISAs were introduced in 1999 for an initial period of 10 years and the Government has announced that this period will be extended indefinitely.
Other changes affecting ISAs are:
- the investment limit raised from £7,000 per tax year to £7,200
- there will now be just two categories the cash ISA and the stocks and shares ISA
- up to £3,600 can be held in cash, with the balance in stocks and shares. Where no cash ISA is held the full allowance can go into stocks and shares
- savers investing in both categories of Individual Savings Account will have the option of investing in two separate ISAs each tax year, one for each category and these can be with the same or different providers
- Mini and Maxi ISAs will no longer exist: Mini cash ISAs, TESSA-only ISAs and the cash component of a Maxi ISA will automatically become cash ISAs
- Mini stocks and shares ISAs and the stocks and share components of a Maxi ISA will automatically become stocks and share ISA
- all PEPs will automatically become stocks and shares ISAs
- cash held in ISAs at 5 April 2004 can be transferred into stocks and shares without it counting as the current year’s subscription
- money held in Child Trust Fund accounts will be able to be rolled over into an ISA when the child reaches 18
All the tax benefits of ISAs continue; namely:
- exemption from capital gains tax on profits
- reclaim of income tax on interest on cash and fixed interest stock (this is done by the ISA manager on your behalf)
- higher rate tax payers pay less tax on dividend income than they would if they held the shares outside an ISA
ISAs were introduced by the current Government in the 1999/2000 tax year to replace the PEP and TESSA products established under the Conservatives. The PEP principles of tax-free growth were retained for ISAs, as was the tax-free interest offered by TESSAs on deposit accounts. However, ISAs should not be seen as a continuation of PEPs and TESSAs. ISAs were introduced by the Government to encourage people to save money for their future.
Because the tax benefits are so good the Government has put a limit on the amount you can save in each tax year. Not only do you have the flexibility to invest tax efficiently in two different ways, when you invest in the stock and shares component, you can now choose from a wider range of global funds than previously allowed through PEP investment including property, gilt, bond and fixed interest funds.
The principle benefit of investing in an ISA is that there is no CGT to pay on any investments within the ISA and no personal liability on income tax, even if you are a high rate taxpayer. Dividends are fully taxable, however, investments in corporate bonds and gilts are tax free and the provider is able to reclaim the full 20% tax credit. Income taken from an ISA is totally free from income tax even for a higher rate tax payer.
Personal Equity Plans (PEPs)
Although PEPs can no longer be bought by new investors, there are still many investors who hold PEPs which they bought in the late 1980s and 1990s.
Even though PEPs may be seen as old news, many people have built up and retained substantial PEP portfolios. Due to this, existing PEPs should be regularly reviewed to ensure they are meeting investor’s requirements. In addition PEP and ISA units can be re-registered on a fund platform. This allows you to retain all the tax benefits and the same number of units whilst only needing to refer to one place for valuations and investment administration.
