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Allowances (Part II) – get the best from your ISA

Your ISA is still one of the best ways to save and invest tax-efficiently. Each year, you can put up to £20,000 into your ISA(s) and generate dividends, capital gains and interest without tax. Over time, this could allow you to build a significant tax-free ISA portfolio (excepting inheritance tax – or IHT – which is typically levied on ISAs after an estate owner’s death). Getting the most from your ISA, however, is not always clear; especially when other tax allowances, inflation and tax rules can impact your strategy. Below, our financial planning team at Vesta Wealth here in Stockton-on-Tees, County Durham offers this short guide on how to use an ISA allowance in 2022-23. We hope it helps you and we invite you to get in touch to discuss your own strategy with us.

 

ISA allowances and different ISA types

In a given tax year (April to April), you can pay into multiple types of ISA – albeit into only one of each type in each tax year. For instance, you could put £10,000 into a cash ISA for the 2022-23 tax year, and then apportion your remaining ISA allowance (£10,000) into a single stocks & shares ISA. What you cannot do is put that remaining £10,000 into two separate stocks & shares ISAs in the same tax year.

Bear in mind that one particular ISA – the Lifetime ISA (or “LISA”) – only lets you put £4,000 into it each tax year. This latter type gets a 25% “boost” from the government, up to £1,000.

In addition to saving towards your own investment objectives, you can also consider putting money aside for your children that can grow in a tax-free environment. A Junior ISA can be opened by a parent or legal guardian on behalf of a child under the age of 18. The limit that can be put into it each tax year is £9,000. This is in addition to your own ISA allowance of £20,000 per year. After the child legally becomes an adult, however, ownership and control of the ISA move over to them.

 

ISA rules to consider

Readers should note that ISAs are available only to UK residents. If you move overseas, then you cannot open any more accounts whilst living abroad. In the following tax year after you move, you can no longer contribute to any existing ISAs.

Any unused ISA allowance is lost on the 6th of April each year and cannot be “carried over” to any following tax years. However, you can transfer cash or investment ISAs from previous tax years into new ISA accounts, and this will not be counted into your £20,000 annual allowance. Your allowance only applies to what ‘new’ money you deposit into your account(s).

 

Ideas to get the most from your ISA

In 2022, inflation is running quite high; 9.1%, which is the highest rate in 40 years. Cash savings accounts and Cash ISAs however do not offer interest rates that come anywhere near this (even on the fixed-rate deals). This means that, at the present time, cash loses value in real terms quite dramatically. Therefore, individuals should take care to not hold too much in cash (3-6 months’ worth of living costs is a good idea, to help tide you over in an emergency). Your ISA allowance, moreover, will likely be better used towards other asset classes which can give you a better chance of matching – even beating – inflation (e.g. equities).

However, before you think about concentrating all of your investment contributions into a stocks & shares ISA, consider whether you could save more tax by using other allowances alongside your ISA. For instance, each tax year you get a £12,300 capital gains tax (CGT) allowance when you dispose of assets (outside of an ISA, pension or another tax-efficient vehicle). Certain assets cannot be held in an ISA, however, such as Buy To Let property. As such, if you plan on selling a second property within a given tax year as well as some equities or bonds, then it may be worth selling the latter from inside your ISA (so your Buy To Let can fully benefit from the £12,300 CGT-free allowance). Alternatively, you could delay the sale of certain assets until the following tax year, but at this point, their value might have gone down.

Of course, your financial goals are also significant when planning how to maximise your ISA allowance. If you are saving for your first home, for instance, then you will likely want to put as much as possible into your Lifetime ISA (to get the most of the government’s 25% “top up” to your contributions). However, if you are in retirement and looking to mitigate a future inheritance tax (IHT) bill, then you may wish to consider alternative investment market shares (AIM) within an ISA for any savings/investments you may wish to make (e.g. after receiving a lump sum from a recently-deceased relative). AIM shares receive Business Relief which reduces IHT at 50% or 100% on qualifying business assets.

Finally, make sure that you get the best deal regarding the fees you pay for your ISA platform and the funds it offers. Some providers are more expensive than others. Whilst others offer a lower cost, but typically do not have as many investment options. Remember, fees eat into your returns. A financial planner can help advise you on how to find the right balance and ensure your investments are working towards meeting your financial objectives.

 

Invitation

If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.

Reach us via:

t: 01228 210 137
e: [email protected]

This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.

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July 18th, 2022