Making the most of those tax advantages

By Craig Davidson, Davidsons IFA

Financial advisers and journalists always say use your ISA allowance. Why? What’s so special about an ISA that it almost always comes at the top of the priority list?

The main point about an ISA is it is not an investment, it is simply a tax wrapper which enjoys major tax advantages. As a result, any capital profits and income receipts from an investment held within the ISA wrapper are free from any liability to personal tax. Where interest accruing to an ISA on corporate or government bond holdings is received with a 20% tax credit, that credit is reclaimable by the fund manager.

As with any tax efficient investment, there are limits as to how much we can invest. The annual ISA allowance is currently £20,000 which can be saved in cash with one provider with the remainder being invested in stocks and shares with either the same or a different provider.

A rule introduced as a result of the 2015 budget allows us to withdraw money from our ISA and repay it back into the same ISA during the same tax year, without losing our annual ISA allowance. As an example, you could fully fund your ISA with £20,000, subsequently make a withdrawal of £5,000 and then top your ISA back up by £5,000 later in the same tax year.

Finally, ISA investments can now pass between husband and wife on death, without being disinvested from the ISA itself. This means that the years of building up a tax-free investment are not lost on death, but can be transferred to the surviving spouse.

Given these tax advantages, we would usually recommend maximising the amount you hold within your ISA by using your annual allowances for the current tax year. We would then suggest moving investments from outside the ISA wrapper each tax year into the ISA, a process known as “Bed and ISA”. If you can navigate any capital gains issues during this process, it will mean maximising the tax efficiency of your investments.