Following the introduction of the Individual Savings Account (ISA) last year, it is hardly surprising that there were no announcements of any new scheme under this heading.
However the Chancellor announced that the first year limit for the ISA subscription (£7000) which was due to reduce to £5000 from 6 April 2000 will instead be maintained for another year, giving people the opportunity to save more tax free.
The Chancellor also announced that a review of the operation of ISAs will start in April 2000 which will involve discussions with representatives of the savings industry and look at operational issues such as resolving any problems encountered in the first year and a possibility of bringing PEP rules on certain issues in line with the more flexible rules for ISAs.
To refresh your memory, the main features of the ISA are:-
an annual subscription limit of £5,000 (for 2001/2002 and subsequent tax years) of which no more than £1,000 can go into cash and £1,000 into life insurance. The balance can be invested in stocks and shares, unit trusts or investment trusts
in the first two years of the scheme (1999/2000 and 2000/2001), a maximum contribution of £7,000 of which no more than £3,000 can go into cash and £1,000 into life insurance
no minimum subscription and no minimum period of investment
capital from a TESSA can, on maturity, be transferred into the cash part of an ISA, or a separate TESSA only ISA. This does not count against the annual subscription limit for an ISA.
The ISA offers savers freedom from income tax and capital gains tax on their investment. In addition, the 10% tax credit on UK dividend income continues to be reclaimable until 5 April 2004 in the stocks and shares component of the ISA and on equities backing the life insurance component. Insurance policies are exempt from tax on other income and gains within the ISA.
Insurance companies and friendly societies are free to offer a wide range of life insurance products within the new savings account. This means that savers must be under no obligation to keep up premium payments in order to obtain policy benefits – but insurers may, if they wish, offer policies with recurrent single premiums payable for more than one year, or where the amount payable during the year is broken down into, say, monthly premiums.
Savers have the choice of one of two ISAs each year – a maxi ISA or a mini ISA.
The maxi ISA is an ISA with one ISA manager. It has an annual maximum subscription limit of £7,000 (for 1999/2000 and 2000/2001) and £5,000 thereafter. A maxi ISA must offer a stocks and shares component, with or without a cash and/or insurance component. The limit on investment applies only to the cash component (£3,000 for 1999/2000 and 2000/2001 and £1,000 thereafter) and the insurance component (£1,000 per tax year). To determine how much can be invested in the stocks and shares component it is therefore necessary to deduct from the annual subscription limit any amount subscribed to the cash and/or insurance component.
There are 3 types of mini ISA, the investments of which must be kept separate and each of which has an annual upper subscription limit. The subscription limits are £3,000 for a stocks and shares component, £1,000 for a cash component (£3,000 in each of tax years 1999/2000 and 2000/2001) and £1,000 for an insurance component. Mini ISAs can be taken with the same or different ISA managers.
An individual cannot have a maxi ISA and a mini ISA in the same tax year but he can, subject to the overriding limit, have up to 3 mini ISAs in a tax year.
Voluntary CAT (Cost, Access, Terms) standards may be adopted by an ISA manager.
It must also be remembered that:
■ the ISA is now the only tax favoured vehicle for new subscriptions where an individual wishes to invest in equities (outside of a pension plan)
■ all PEPs held at 5 April 1999 can continue to be held as PEPs outside the ISA but with the same tax advantages as the ISA. This means that the 10% tax credit on UK dividends can be paid to PEPs until 5 April 2004
■ there is no upper maximum lifetime subscription limit to an ISA. The Government have given a commitment for the scheme to run for 10 years with a review of its operation after seven years
■ a person is not prevented from investing the maximum to an ISA because of a holding in a PEP or TESSA
■ savers with existing TESSAs opened before 6 April 1999 may continue to pay into them under existing rules for their full 5 year life