The Junior ISA scheme was launched at the start of November 2011 and has since become a popular way to save for a child’s future. For those who haven’t yet investigated the option it is worth reminding oneself what exactly an ISA is and in particular, the definition of a Stocks and Shares ISA (SSISA). This article focuses on SSISAs but to give a full overview on the product we will also need to look at the full gamut of ISA options and the context in which the product fits into the financial spectrum.
An ISA is a financial product in which people can save and invest money with the benefit of certain tax breaks. They were launched at the start of the 1999/2000 tax year with the aim of providing the wider public with a more accessible tax beneficial savings solution than the existing Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs).
The main attractions of ISAs are that they carry tax exemptions on the income generated by the products whilst still allowing savers to instantly access their funds. They also allow savers to invest in stocks and shares as well as just storing their funds a cash. There are however restrictions which apply in that there is a limit (or rather limits - see below) to the amount of money that savers can put in each tax year.
There are currently two types of ISA available to the UK saver: the Cash ISA (CISA) and Stocks ad Shares ISA (SSISA). As the names suggest the CISA is primarily designed to hold cash whilst the SSISA is primarily designed as a vehicle for investing savings in stocks and shares.
Stocks and Shares ISAs are available to over 18s (Cash ISAs are open to over 16s) and can hold a range of investments including, amongst others, cash (as long as it is deemed to be awaiting investment), collective investments (Units Trusts, OEICs and Investment Trusts. Subject to certain criteria), company shares (listed on recognised stock exchanges and debt securities (corporate bonds, government bonds. Subject the term having at least 5 years to run). All of the non-cash investments must also be deemed to have the potential to lose 5% of their value to be permitted. Any that are not, may in theory be held in a CISA but it is rare to find a provider that offers the service.
A contribution to an ISA is termed a subscription and all ISA subscriptions must be made in cash. The limit that savers can subscribe to ISAs in total for the current tax year is £10,200. All of this allowance can be paid into a Stocks and Shares ISA or up to half, £5,100, can be paid into a Cash ISA with the remainder of the unused £10,200 allowance going into a SSISA. These limits are set to rise in line with inflation each tax year (with increments rounded to the nearest £120), with the figures for 2011/12 being £10,680 (SSISA/Total) and £5,340 (CISA).
Subscriptions cannot be spread between multiple ISAs of the same kind in the same tax year, although subscriptions can be made to both a Cash ISA and Stocks and Shares ISA concurrently. There is also no limit on the number of ISAs that an investor may hold from previous tax years.
Funds can be transferred between ISAs although there are restrictions to ensure savers can’t oversubscribe. The transfers must occur directly between ISA providers; if the money is withdrawn by the saver with the intention of placing it back in another ISA it effectively becomes a subscription and therefore affects their allowance for that tax year.
If a saver is transferring monies that are current year subscriptions from one Cash ISA to another CISA they must transfer the entire sum of current year subscriptions to ensure that they have not subscribed to two separate CISAs in the same tax year. However, a saver can transfer only part of their current subscriptions from a CISA to a Stocks and Shares SISA as the allowances of the two products can be adjusted accordingly (the transfer would then count against the SSISA allowance not the CISA).
Neither the Stocks and Shares ISA or the Cash ISA are subject ot Capital Gains Tax (CGT) although that does also mean that any losses made on the SSISA cannot be used to offset gains elsewhere and reduce an individual’s CGT obligation. Both ISAs are exempt from tax on dividends,the SSISA is exempt from tax on interest on bonds whilst the CISA is also exempt from tax on interest from cash.
Stocks and Shares ISAs are still subject to other charges though such as Initial Management Charges (IMCs), Annual Management Charges (AMCs) and transaction charges by the ISA provider or fund manager, however, these charges are often heavily discounted or removed for commercial reasons. Any charges on Cash ISAs will most likely be incorporated into the interest rate calculations.
Although ISAs were designed to supersede the existing PEPs and TESSAs when they were launched in 1999, both products were maintained alongside the new ISAs - that is they could still be held although no longer open to new subscriptions. TESSAs allowed savers to invest £9,000 across a 5 year term during which the saver could draw down the interest on the capital but not the capital itself, which could only be withdrawn when the account matured. For those maturing after the introduction of ISAs, the TESSA-Only ISA (TOISA) was created to allow the saver to reinvest the capital. The last TESSAs matured on 5 April 2004. However, at the start of the 2008/09 tax year the decisions was taken to re-classify the PEP and TOISA to fit into the ISA structure; PEPs became de jure SSISAs and TOISAs became CISAs.
The structure of the ISA was slightly different when it was launched as it is today in that there two main types available, the mini and the maxi ISAs. Mini ISAs were further categorised as Stock or Cash ISAs, although an individual could subscribe to one of each within a given year (even with different providers). The limits were set to £4,000 for the mini stock ISA and £3,000 for the mini cash ISA, with a total subscription limit therefore of £7,000. The alternative maxi ISAs combined the cash and stock elements into one product although the limit to cash subscriptions remained at £3,000 and the total allowance at £7,000; any of the £7,000 not invested in cash could be invested in stock. The switch the current structure of Cash ISAs and Stocks and Shares ISAs with no mini vs maxi distinction came at the start of the 2008/09 tax year.
Going forward the UK Government have announced that they are to launch a Junior ISA for the 2011/12 tax year which will replace the outgoing child trust fund. The Junior ISA will allow guardians to subscribe to an ISA on behalf of a minor who will then have access to the funds when they turn 18. In all other aspects the ISA will follow the conventional structure and rules.
With the clock counting down to the end of the tax year now might be the last chance to take advantage of this tax year’s ISA allowances or to do your research ready for the advent of the next set of allowances. Either way, it might be a good time to investigate opening a Stocks and Shares ISA or ISA investment Trust.
© Stuart Mitchell 2012
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