ISAs have been around for nearly 20 years now but with more choice, greater freedom and bigger allowances has come more confusion, says Proplend’s chief executive Brian Bartaby, as he sets out to dispel some of the uncertainty here…
You don’t need to invest all your annual ISA ‘subscription’ allowance to one ISA, or in one go
For the current tax year (beginning 6 April 2017) the annual ISA subscription limit for new investment is £20,000 – you can choose to invest up to this amount across all your ISAs and providers. It’s your choice, and often a good idea to diversify your ISA portfolio across types (asset classes), providers and specific investments.
There are also arguments, financial and practical, for spreading your investments across the tax year. Laying your hands on £20,000 in one go might be a little unrealistic for many of us. More likely, it will be a matter of subscribing what you can afford early in the tax year to make sure you start benefiting from tax-free returns sooner rather than later. Then subscribing more later in the year as and when you can afford to, or as and when you see new investments and providers of interest. This is particularly true for Innovative Finance ISAs (IFISA), where new providers and loan investments are presenting themselves all the time.
You can open more than one ISA of each type each tax year
The one ISA of each type, each year limit is a HMRC restriction on how many ISAs you can subscribe to not how many you can open. So you could subscribe £5,000 each to a cash ISA, a stocks and shares ISA and an IFISA and open a second IFISA in the same year to invest previous years’ ISA funds only.
IFISA is still relatively new and it’s understandable that people are going to want to diversify peer-to-peer loan investments quickly (rather than having all their eggs in one basket with one provider). ISA transfer freedom can therefore prove particularly useful for rebalancing your ISA portfolio and spreading risk.
You can invest to an IFISA with ISA transfers as well as subscriptions
By transferring funds from existing ISAs, you can build up the P2P loan investment proportion of your ISA portfolio quickly – irrespective of how much you can afford to subscribe in the current tax year. You’re free to transfer some or all your pots from previous tax years, invested with different providers and asset classes, to a new or existing IFISA.
Many people will have invested to cash ISAs when returns were meaningful and invested to stocks and shares ISAs for higher returns despite the volatility of the value of the underlying asset. But this money doesn’t have to stay invested in the original ISA to remain ring-fenced. It can sit within any ISA to retain the tax-free status.
Even when cash ISA rates were significantly better than they are now, initial ‘tempter’ rates typically fell away after the first year, and if the income in years two and three is minimal then the tax-free benefit will be minimal too. Why not shop around for better rates like you would for other products and use your freedom to reinvest the money where it will work harder for you?
You can even transfer current year subscriptions within another ISA
It’s not just previous years’ ISA investments that you’re free to transfer. You can transfer current year subscriptions too – either together with previous years’ money or separately. This can be a transfer from one ISA type to another, or even between two ISAs of the same type.
If you do transfer current years’ subscriptions then you will be required to transfer all those subscriptions together. If you’re transferring these subscriptions to a new ISA of the same type then the receiving ISA will effectively be the replacement one for the year. If you’re transferring to a different ISA type you still have your one for the year of the original type available to use – it doesn’t break HMRC subscription rules.
All ISA transfers, irrespective of type, must be made as cash. Investments held within transferring stocks and shares ISAs and IFISAs may have to be sold to fund the transfer, so it’s important to consider potential fees and investment losses.
You can withdraw ISA monies from previous years from a flexible ISA and return them within the same tax year
Just as you can transfer both current and previous year ISA monies, you can withdraw current and previous year ISA monies flexibly where the provider allows. Flexible ISAs enable savers to withdraw all current and past year ISA monies and return them within the same tax year without the deposit being considered as a new subscription.
You can potentially withdraw as much or as little as you like up to the total value of the pot. Any fund you don’t put back before the end of the tax year in which it was withdrawn will be treated as a permanent withdrawal. Any amount paid back in excess of that withdrawn will be treated as subscriptions (remaining allowance permitting), as will any amount paid back after the end of the tax year in which the funds were withdrawn.
Remember, not all ISAs are flexible – the majority still won’t be. For non-flexible ISAs all withdrawals are permanent, so check before requesting a withdrawal and ideally before opening in the first place. Flexible ISA providers may have restrictions on what can be withdrawn but you won’t normally need to declare whether you intend to return funds when you withdraw them.
For flexible IFISAs, including Proplend’s offering, you’ll need to sell investments if requesting a withdrawal that’s more than your available cash balance but flexibility could prove particularly useful if you want to draw the regular fixed income returns from the ISA.
You don’t need to report ISA income on an annual tax return
Nice and simple this one. No paperwork and no explanation required.