While the pension changes that I outlined last week really stole the budget headlines, the changes to the ISA rules were also significant. The contribution limit
will initially increase to £11,880 on April 6, and then the increase in contribution limits to £15,000 per annum will come into force in July. This raises the limit from the current limit of £11,520. Junior ISAs will continue under the new rules and from July 1, the contribution limit will increase to £4,000.
The most significant change, however, is the merging of the investment and cash ISA allowances, giving the ability to transfer Investment ISAs back to cash ISAs.
Quite why anyone would want to transfer an investment ISA to a cash ISA is beyond me. It is very unlikely that cash ISAs will actually produce any real return
after inflation is taken account unless the cash ISA is locked away for many years; and if an ISA contribution isn’t needed to be spent for many years, then it is much more likely that a well researched investment ISA will produce a better return.
The combining of cash and Investment ISAs into one, will mean that if you move part of a portfolio temporarily into cash for tactical reasons, that the fund manager can now pay interest on the cash fund gross without deduction of tax.
This is a big advantage as it is common practice for financial advisers to take defensive action from time-to-time by moving out of certain markets and into cash to minimise risk. For example, last month we moved our ISA clients out of Eastern European and Russian markets until the Ukraine crises settles down and this change will benefit those investors who are temporarily invested in cash.
The other main tax benefits of ISAs will be unchanged. They will continue to be free from capital gains tax, income tax on rental income and interest and free from higher rate tax on dividends.
One potential drawback with ISAs has always been that they are potentially liable to Inheritance Tax. It is now possible, with careful planning, to invest ISAs in funds that are exempt from Inheritance Tax, saving potentially tens of thousands of pounds on some of the larger ISA portfolios.
David Hill is a Chartered Financial Planner and Independent Financial Adviser at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 2827 6814 or by email: email@example.com