Characteristics of the ISAs

When approaching the world of investments, it is common to come across the acronym ISA. It stands for Individual Savings Account and refers to a specific category of investment arrangement. It is available in the UK for citizens and employees of the Crown. Every holder of an ISA needs to have a National Insurance number – it is one of the requirements. The Individual Saving Account is a lucrative option for investors, since it is exempted from taxation on the returns. Capital Gains Tax and Income Tax are not charged to the account owner. However, ISA has a restriction related to the amount of money that can be allocated on an annual basis, indeed for the current tax year (2021/2022) the annual allowance is fixed at £20,000. There are different types of ISAs and each one is more suitable according to the investor’s profile, the age and the goal of the investments. There are different factors to consider before opening such an account. If on one hand there is withdrawal flexibility of ISAs and a wide range of investment choices, on the other there are contribution limits and inheritance tax liabilities.

Wide range of investment choices

The different ISAs represent some profitable options for the investors. The main point is related to the fact that the returns generated are not subjected to taxation. This alone might be a valuable reason to invest through one of these accounts. Aside from this factor, ISAs offer a wide range of investment choices. Investors have different possibilities and options to pick from. According to the preferences of the single individuals it’s possible to allocate money in, stocks, bonds, funds shares, and more. For a safer profile there is also the cash option available on a specific account. Moreover, withdrawing is tax-free. Investors can withdraw their funds at any time from ISA (except for those who have a fixed-rate account) and no fee will be applied.  Of course, it’s not recommended especially at an early stage, since it can affect the returns.

Account transfer and taxes applied on contributions

While the returns are not subjected to taxation, every contribution to the account is. This is not exempted from taxation. If this tax is going to be relevant, investors might consider other investment options available, such as SIPPs. Once an ISA is open it can be transferred to another provider. It is not mandatory to maintain the original one throughout the course of its existence. Switching providers is quite common, especially when it comes to the possibility of having higher interests. Transferring the account is not the only option to have a better return. The funds allocated can also be transferred among different types of ISAs. As stated before, the annual contribution limit for the 2021/22 tax year is £20,000.

Inheriting an ISA account due to the death of the holder

ISAs are only for individuals; it is not possible to open a joint Individual Savings Account. Even in the case of couples, each spouse should have their own account. This factor might lead some investors to prefer different savings accounts over these specific ones. Although, it’s possible to inherit an ISA. If either a spouse or a civil partner dies the account can pass to the other. It happens through an inherited ISA allowance, that is a payment of the same amount that was deposited up to that point. Moreover, in case of the death of the ISA holder, the account can be inherited by a chosen beneficiary, but if this person is not the spouse, there might be an inheritance tax bill to pay in order to receive the money.