Your IndustryFeb 27 2014

Full tax advantages and new IHT opportunity

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You pay no UK tax on any of the income you receive from your Isa savings and investments - this includes interest and bonuses.

You also pay no UK tax on capital gains arising on your Isa investments, though losses on Isa investments cannot be allowed for capital gains tax purposes against capital gains outside your Isa.

For basic rate tax payers, Brian Morris, head of savings policy at the Building Societies Association (BSA), says having a building society account with an Isa will mean not having to suffer the 20 per cent deduction for income tax from the interest that would otherwise be made.

Higher rate taxpayers will save a further 20 per cent of each interest payment, and there is a 25 per cent saving for additional rate taxpayers.

Mr Morris says: “The exemption from capital gains tax of gains on selling equities, etc, held within an Isa is worthwhile only to those people whose taxable gains for the tax year concerned would be more than the annual exempt amount (£10,600 for 2013 to 2014).”

Peter Shipp, director of investment schemes for the Tax Incentivised Savings Association (Tisa), says you do not have to declare income and capital gains from Isa savings and investments or even tell your tax office that you have an Isa (unless your account has breached the Isa regulations in some way and been declared partially or totally void).

Mr Shipp says: “Always be aware that tax benefits depend on an individual’s circumstances.”

In August 2013 the government changed Isa rules, allowing Alternative Investment MArket shares to be held in an Isa for the first time.

Mark Williams, business line manager for inheritance tax planning at Octopus, says the inclusion of Aim shares in Isas has proven to be a welcome change.

Mr Williams says a number of Aim listed companies’ shares are eligible for business property relief (BPR), which enables shares in a qualifying company that have been held for at least two years to become exempt from inheritance tax provided they are held at the time of death.

This means that by transferring some or all of their Isa savings to an Isa manager specialising in Aim investments, Mr Williams says savers can protect the value of their Isa in order to pass it onto loved ones without it being subject to 40 per cent inheritance tax.

Mr Williams says: “There are over 5.6 million Isa savers aged 65 and over, so relief from inheritance tax is naturally a compelling tax advantage which we have already seen hundreds of investors opting to benefit from.

“And in addition to delivering multiple tax benefits, investing in an Aim inheritance tax Isa also provides investors with exposure to some of the UK’s most exciting smaller companies.

“Aim is home to a hugely diverse range of companies, many of which have the potential to deliver significant long term growth.”

Others have argued that the benefit is of little use to most older savers, however, as the additional risk of holding Aim shares would likely not meet the risk profile and thus the investment would not be suitable, irrespective of any IHT relief.

Perry Braithwaite, Investment Management Association (IMA) adviser on product regulation, says with Stocks & Shares Isas higher rate tax payers do no have to pay the extra 25 per cent income tax on dividends that they would have to pay outside an Isa.

Additional rate taxpayers do not have to pay the extra 30.55 per cent income tax on dividends that they would have to pay outside an Isa, Mr Braithwaite points out.

If you hold corporate bonds or bond funds within an Isa that pay out interest distributions, Mr Braithwaite says you will be entitled to receive the interest gross or reclaim the savings tax of 20 per cent.

There will be a charge of 20 per cent on interest earned on cash held in a Stocks & Shares Isa, Mr Braithwaite notes.

However, he says higher rate and additional rate taxpayers, who would otherwise pay 40 per cent and 45 per cent income tax respectively outside an Isa, will not have any further tax liability.

Mr Braithwaite says: “There is no capital gains tax (CGT) on any gains made from an investment held within an Isa. However, you can’t offset any losses from your Isa investment against any gains made from non-Isa investments in order to reduce any CGT owed.”