The value of investments and the income they produce can go down as well as up, and you may not get back as much as you put in. Tax treatment varies according to individual circumstances, and is subject to change. For ISAs, investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income received by the ISA manager from stocks and shares.

Three of the most popular types of investment are covered here:
INVESTMENT BONDS     ...Underlying Investments     ...Capital Growth     ...Encashment     ...Income Withdrawals     ...Taxation INDIVIDUAL SAVINGS ACCOUNTS (ISAs)     ...Underlying Elements     ...Types of ISAs     ...Investment Limits     ...Capital Growth     ...Encashment     ...Taxation     ...Junior ISAs (for under 18 Year-Olds)     ...Lifetime ISAs     ...Help to Buy ISAs OPEN-ENDED INVESTMENT COMPANIES (OEICs)     ...Underlying Investments     ...Capital Growth     ...Encashment     ...Income     ...Taxation

INVESTMENT BONDS

An Investment Bond is a lump sum investment, managed by a life assurance company. Money you invest purchases a number of units within a fund, run by professional investment managers.

Your units are pooled with those of other investors.

Underlying Investments

Within each fund, there's a substantial range of underlying investments: stocks & shares, property, deposits and so forth.

The type and range of underlying investments depends upon the fund(s) selected.

Investment Bonds and Capital Growth

The value of most underlying investments goes up and down. And so, therefore, does the value of your units.

Over the medium-long term, asset-backed investments such as Investment Bonds usually out-perform deposit-based investments. However, they don't provide the same capital stability / security as deposits.

Encashing Investment Bonds

Most Investment Bonds don't need to be encashed on a particular date in the future - they remain available for life.

Investment Bonds don't need to be encashed in full. You can encash just a percentage or £X's worth.

For married couples, Investment Bonds are usually written on both lives - so they can continue until second death.

Income from Investment Bonds

Regular income withdrawals can be taken (e.g. monthly). There may be a minimum and/or maximum level set by the provider.

Withdrawals can constitute a return of capital and/or profit.

Usually, the size of any withdrawals taken can be varied from time to time, to suit your needs. NB: The higher the withdrawals = the less opportunity for any capital growth, of course.

Investment Bonds & Taxation

The underlying fund pays some tax. So, the benefits payable on death or withdrawal are free from both personal Capital Gains Tax and Basic Rate Income Tax.

For 'part-surrenders' (usually in the form of regular withdrawals): up to 5% p.a. of the original capital may be withdrawn free from personal tax liability - until the total withdrawn equals the sum originally invested. The allowances are rolled-up if less than 5% p.a. is taken (e.g. none for 4 years then take up to 20%).

Any profit withdrawn or any withdrawals taken in excess of 5% p.a. can be liable to Higher rate(s) of Income Tax and/or can affect items such as Age Allowance if available to you at the time (it depends on your personal income position).

<Top of Page>

INDIVIDUAL SAVINGS ACCOUNTS

Individual Savings Accounts (ISAs) enable UK residents to save or invest in one of the most tax-efficient and flexible ways possible.

Underlying Elements of ISAs

ISAs may contain one or two elements:

Investment ISA (Stocks & Shares): Investment is into collective funds such as Unit Trusts / Investment Trusts / Open-Ended Investment Companies (OEICs). The main purpose is for long-term, tax-efficient capital growth potential.

Cash ISA (Cash Deposits): Savings in a bank or building society account. The main purpose is to have some non-volatile money which accumulates tax-free interest.

Types of ISAs

There are two main types of ISA:

Single-Manager: Usually chosen for making maximum investment into the Stocks & Shares element, but might also offer the Cash element.

Separate Managers: Separate plans for each of the two types of underlying elements.

ISA Investment Limits

Individuals may invest up to an overall maximum per tax-year: - during the 2022-23 tax-year: £20,000. - during the 2023-24 tax-year: £20,000.

In addition to the annual limit, when an ISA-holder dies, their surviving spouse / legal civil partner has an extra one-off allowance equivalent to the deceased's ISA value. This special allowance is in addition to the survivor's normal allowance - enabling the couple's total tax-efficient ISA holdings to continue: usually by transferring the deceased's ISA across to the survivor's ISA.

ISAs and Capital Growth

The value of a Stocks & Shares ISA is linked to the value of its underlying assets. It goes up and down. Especially over the short term, fluctuations in value are to be expected.

Share-based investments have in the past generally out-performed deposit accounts over the medium-long term. However, they don't provide the same capital stability / security as cash-based accounts.

The value of a Cash ISA is dependent upon interest rates, which can go up and down. The amount you put into the account won't go down, but a Cash ISA's value probably won't keep up with inflation.

Cash-based savings provide capital stability / security for funds which are not to be exposed to fluctuations in value. However they have in the past generally under-performed share-based investments over the medium-long term.

Encashment of an ISA

ISAs do not need to be encashed on a particular date in the future. Nor need they be held for a minimum period (although share-based holdings should be considered as medium-long term investments).

ISAs do not (usually) have to be encashed in full.

NB: If you invest to the maximum limit within a tax-year and then withdraw some capital, you might not be allowed to make any further ISA investment during that particular tax-year.

ISAs & Taxation

Capital gains within ISAs are exempt from Capital Gains Tax (CGT). A capital loss within an ISA cannot, therefore, be used to offset a gain realised elsewhere.

Interest from cash deposits and/or fixed-interest securities (e.g. corporate bonds) is tax-free within ISAs.

Dividends from shares within an ISA are not liable to any personal Income Tax.

Following the death of the ISA-holder, ISAs maintain their tax-efficiency until they're closed (or 3 years after death if not closed). But ... since April 2015 the ISA-holder's surviving spouse / legal civil partner has an extra allowance equivalent to the value of the deceased's ISA(s). This special allowance enables a couple's tax-efficient ISA holdings to continue (in the spouse's name).

Although investors do not pay any tax on income or gains within ISAs, ISA fund managers might have to pay some unrecoverable tax on income they receive from stocks and shares.

Junior ISAs (for Under 18 Year-Olds)

These tax-free savings accounts are available to UK Residents aged under 18 who do not have a Child Trust Fund.

Junior ISAs are opened and managed by the person(s) who have parental responsibility for the child. Upon attaining age 16, the child may take over responsibility for managing their Junior ISA, if they wish.

Funds within Junior ISAs are not accessible until the 'child' attains age 18, at which time a Junior ISA becomes an 'ordinary' ISA in their name. He / she may then take withdrawals / encashments / an income / continue the holding.

TYPES

As with 'ordinary' ISAs, there are two types of Junior ISAs: Stocks & Shares = Investment Junior ISA: ...Investment into collective funds such as Unit Trusts / Investment Trusts / Open-Ended Investment Companies (OEICs). Cash Deposits = Cash Junior ISA: ...Savings in a bank or building society account.

Transfers between the two types (and between providers) are allowed.

LIMITS

Annual contributions are capped at: - during the 2022-23 tax-year: £9,000. - during the 2023-24 tax-year: £9,000.

Unlike Child Trust Funds, there are no State contributions.

Unlike 'ordinary' ISAs (where a new Cash ISA and a new Investment ISA may be opened every tax-year), with a Junior ISA, the child may hold only ONE cash and only ONE stocks & shares account.

BENEFITS

Because children have a Personal Allowance for Income Tax (the same as adults do), most children do not pay tax on savings anyway - so the main benefits of a Junior Cash ISA might usually be: 1. the continuation of tax-free interest post- age 18 after becoming a tax-payer, on funds accumulated during childhood. 2. building up additional tax-free savings by parents who intend to give the fund to their child(ren) at age 18.

The main benefits of a Junior Investment ISA might be: 1. the ability for under-18's to own 'real' assets (although they can't access them until age 18 and trusts could be used with alternative types on investment by parents, in perhaps a more flexible manner). 2. the avoidance of a future Capital Gains Tax (CGT) liability on the growth in value of those real assets.

NB: parents who give money to their children to hold in a Cash Junior ISA could end up paying tax: If the interest generated exceeds £100 p.a., then all of the income will be treated as the parents' and should be declared for tax purposes.

Lifetime ISAs

The aim of Lifetime ISAs is to provide choice for young people to save flexibly for their retirement and/or for their first home.

As with 'ordinary' ISAs, individuals can open more than one Lifetime ISA - but only pay into one Lifetime ISA per tax-year.

GOVERNMENT BONUS

Savers will receive a 25% bonus from the government (i.e. contributions grossed up at Basic Rate of 20%) on the money invested. The bonus is added via the ISA manager on the contributions invested.

RISK WARNING

You will incur a Lifetime ISA government withdrawal charge (currently 25%) if you transfer the funds to a different ISA or withdraw the funds before age 60 and you may therefore get back less than you paid into a Lifetime ISA.   By saving in a Lifetime ISA instead of enrolling in, or contributing to an auto-enrolment pension scheme, occupational pension scheme, or personal pension scheme: (i) you may lose the benefit of contributions from your employer (if any) to that scheme; and (ii) your current and future entitlement to means-tested benefits (if any) may be affected.

AVAILABILITY

Savers must be aged 18 to 40. (Opened accounts may continue to be added to after that time, until age 50).

LIMITS

Annual contributions are capped at: - during the 2022-23 tax-year: £4,000. - during the 2023-24 tax-year: £4,000.

Help to Buy ISAs

Help to Buy ISAs reward people for saving to buy their first house (in the UK).

GOVERNMENT BONUS

Savers will receive a 25% bonus from the government: at the point they use their Help to Buy savings to purchase their first home. For every £200 a first time buyer has saved, the government will provide a £50 bonus. The minimum bonus payable is £400 (so £1,600 needed to get this), and the maximum bonus payable is £3,000 (on £12,000 of savings).

AVAILABILITY

Help to Buy ISAs were available from 01/12/2015 to 30/11/2019 (opened accounts may continue to be added to after that time, until 2029).

Savers must have been aged 16 or over to open an account.

LIMITS

The maximum monthly deposit is £200 (there is no minimum monthly deposit size).

<Top of Page>

Open-Ended Investment Companies

An Open-Ended Investment Company (OEIC) is similar to a Unit Trust, in that it's a professionally-managed collective investment. In fact, most Unit Trusts have been converted into OEICs.

'Open-ended' means that they do not have a fixed number of shares.

The money which you invest purchases a number of OEIC shares in a fund. Your money is pooled with that of other investors.

Most Investment ISAs are invested into OEICs.

Underlying Investments

There is a vast range of underlying investments within each fund: usually a selection of stocks & shares.

The type and range of underlying investments depends upon which fund(s) are selected.

OEICS & Capital Growth

The value of the underlying investments goes up and down. And so, therefore, does the value of your OEIC shares.

Over the medium-long term, asset-backed investments such as OEICs usually out-perform deposit-based investments. However, they do not provide the same capital stability / security as deposits.

Encashing OEICs

An OEIC investment doesn't need to be encashed on a particular date in the future.

OEICs don't need to be encashed in full. You can encash just a number of OEIC shares or £X's worth.

Income From OEICs

The size of any income produced depends on the particular fund(s) into which you invest.

Income payments are usually half-yearly.

OEICS & Taxation

The underlying fund itself is free from Capital Gains Tax (CGT) - so the liability for CGT is with the investor.

The dividends and interest are liable to Income Tax on the investor (unless the OEIC is held within an ISA or pension plan).

<Top of Page>

The editorial here does not constitute personal advice. It reflects Bernas Coni Warren's understanding of current law and tax practice, and is without prejudice. No liability shall attach. Errors & Omissions Excepted.

© Copyright Bernas Coni Warren

www.BernasConiWarren.com 01275 83 73 03 7 School Close, Whitchurch, Bristol, BS14 0DU

Bernas Coni Warren is a trading style of South Somerset Mortgages Limited which is an appointed representative of Quilter Financial Services Limited and Quilter Mortgage Planning Limited, which are authorised and regulated by the Financial Conduct Authority. Quilter Financial Services Limited and Quilter Mortgage Planning Limited are entered on the FCA Register under reference numbers 440703 and 440718 respectively.