If you aren’t a UK based investor then this article probably wont interest you. But if you are, then you’ll want to read on. The chancellor George Osborne has just announced some of the most major changes to ISAs in a decade. I’m very pleased about them, and along with AIM shares becoming ISA eligible, investors are now in a much better position to wrap their entire portfolio in a tax free ISA.
ISAs
The current tax system in the UK allows people to put up to £11,520 into a stocks & shares ISA in a single year. If you choose to you can put £5,760 into a cash ISA but this counts against the S&S ISA allowance. You probably already know, but an ISA allows you enjoy returns completely free of income tax and capital gains tax. The only tax you do pay is stamp duty (essentially a sales tax) (and before someone says, that 10% tax coupon on dividends isn’t an actual tax).
Many investments are not eligible for a S&S ISA, such as “short” dated bonds (or anything that mimics cash) and until recently shares listed on AIM. This frustrates me, as I often hold significant cash in a portfolio, and because it’s mostly tax protected in an ISA, I have to let it sit being eroded by inflation.
Alas, no more!
NISA
This system has completely changed, for the better. The changes will come into effect on 1st July. Then there will be a single allowance of £15,000 per year that can be put into either a cash ISA or S&S ISA (or both). It can also be freely transferred between the two accounts (and this will include anything you currently have wrapped in ISAs). This is a major shift and here are some of the other key changes:
- You are still only able to open one Cash NISA and one Stocks and Shares NISA each tax-year. However, once open, you can transfer your Cash or Stocks and Shares NISA between providers as many times as you wish.
- You can now hold cash in a S&S NISA. You could do this previously but it accrued no interest. Hopefully providers will start offering decent interest rates on ‘combined’ accounts
- All bonds can now be held in a NISA, regardless of maturity date. Great news for people that hold cash in their portfolio at times because we can now invest in money market funds to at least earn a bit of interest (under normal interest rates it isn’t insignificant).
- Peer to peer loans will become NISA eligible, and the government is looking to add even more options to NISA eligibility
Before 1 July 2014
Between 6 April and 1 July 2014, the old rules apply. The total amount that you will be able to pay into a Cash ISA is £5,940. If you also have a Stocks and Shares ISA, you will also be able to pay into that account, but the combined amount you pay into your Cash and Stocks and Shares ISAs must not exceed £11,880.
From 1 July 2014, your existing ISA will automatically become a NISA and then the new rules come into effect and you can add more up to £15,000 and start transferring.
Source: Budget 2014
Investing Sidekick
Founder of Investing Sidekick. Works as a research analyst and is an avid value investor, always searching for undervalued shares.