Blog: ISA plan to save tax



John Cairns
John Cairns

John Cairns is a tax partner at French Duncan Chartered Accountants

The current low and diminishing rates of interest achievable on deposit accounts make it hardly worthwhile putting funds into a cash ISA.

Interest at 1.4% on a £10,000 deposit would generate tax free income of £140 and, for a 40% tax payer, this would result in an income tax saving of £56. Worth having but hardly earth shattering.

Subject to your attitude to this, it is probably more sensible to utilise your ISA allowance in acquiring shares where there is the possibility of saving both income tax on dividends and capital gains tax on eventual sale.

The recently announced ISA subscription limit for 2015/16 of £15,240 and junior ISA limit of £4,080 are probably the least interesting of the recent changes and there are three really useful relaxations and new possibilities applying to the ISA regime.

Firstly, from 6 April 2015, the surviving spouse or civil partner will have an additional ISA allowance equivalent to the value of the deceased spouses or partners ISA holdings at the date of death. This is in addition to the surviving spouse’s own annual ISA allowance.

The point here is that, previously, on the death of a spouse, the ISAs would be encashed. Where funds had built up in ISAs then, on the first death, some previously tax sheltered investments would end up outwith an ISA wrapper in the hands of the surviving spouse. This relaxation is worth remembering.

Further, from this autumn, you will be able to make withdrawals from your ISA and replace the amount withdrawn in the same tax year to 5 April and the replacement will not be treated as part of your annual ISA investment allowance.

Currently, if you withdrew, say £5,000 from your ISA and replaced it a couple of months later, the replacement would reduce your annual ISA allowance. The incremental amount which you could add to your ISA would therefore be reduced. This change is a common sense and equitable relaxation to the ISA regime.

Finally, again from this autumn, it will be possible to invest in a help to buy ISA. If you are a first time house buyer you will be able to invest a maximum of £200 per month and, for each £1 invested, the government will contribute 25p. The accounts will be available for four years, although you can extract your funds at any time during this period.

Recognising the fact that these new ISAs are only available from the autumn, it is possible to make an initial deposit of up to £1,000 and then contribute £200 per month thereafter. If first time buyers are intending to buy a house jointly then each can have a buy to let ISA and so there can be two (or more) ISAs used towards the purchase of a house.

While some commentators have belittled the maximum £3,000 addition to a £12,000 buy to let ISA against the maximum purchase price of £450,000 for a house in London and £250,000 elsewhere, £3,000 will be a very useful help for people purchasing their first flat for, say, £80,000.