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All change for ISAs – new tax-free ways to save

Despite ongoing low interest rates and the recent introduction of the Personal Savings Allowance, ISAs still form a valuable part of the savings portfolio for many individuals. Here we outline some recent changes to the ISA regime.

Increased flexibility
From 6 April 2016, new measures allow savers to replace cash they have withdrawn from their ISA account earlier in a tax year, without this replacement counting towards the annual ISA subscription limit. This can also be done for cash that is held within stocks and shares ISAs if the provider offers the facility through a cash trading account.

Under the ISA Regulations, the new flexibility is available in relation to both current year and earlier year ISA savings. However, the ISA provider needs to have changed the terms and conditions to allow a ‘flexible ISA’.

Help to Buy ISA
First-time buyers can save up to £200 a month in this tax-free savings account, which the Government will top up in the form of a 25% bonus, up to a maximum of £3,000. Users can also open a Help to Buy ISA account with a lump sum of £1,000, in addition to the monthly maximum.

From 1 February 2016, where a saver has closed their Help to Buy ISA and withdrawn their savings, but their intended home purchase does not proceed, they can also replace their savings in an ISA or Help to Buy ISA without this impacting on their ISA subscription limit.

The Innovative Finance ISA
The new Innovative Finance ISA is designed to encourage peer-to-peer lending. It can be offered by qualifying peer-to-peer lending platforms in accordance with the ISA Regulations.

Loan repayments, interest and gains from peer-to-peer loans will be eligible to be held within an Innovative Finance ISA, without being subject to tax.

An ISA investor will normally be entitled to subscribe new money each year to a maximum of one Innovative Finance ISA, one cash ISA and one stocks and shares ISA. The amount of new money paid into all of the ISAs held by an investor must not exceed the overall ISA subscription limit for the year – which for 2016/17 is £15,240, rising to £20,000 from 2017/18.

Returns on Innovative Finance ISAs have the potential to be significantly greater than on cash ISAs, but they will carry a greater degree of risk.

Lifetime ISA
From 6 April 2017 any adult under 40 will be able to open a Lifetime ISA. They can save up to £4,000 each year and will receive a 25% bonus from the Government for every pound they put in, up to the age of 50.

Funds can be used to save for a first home or for retirement. Features include:

  • both the savings and Government bonus can be used towards a deposit on a first home, worth up to £450,000
  • accounts are limited to one per person rather than one per home – so two first-time buyers can both receive a bonus when buying together
  • during the 2017/18 tax year, those that have a Help to Buy ISA can transfer the savings into a Lifetime ISA, or continue saving into both, but will only be able to use the bonus from one to buy a house
  • after their 60th birthday individuals can withdraw the savings, tax-free
  • savers can withdraw money at any time before their 60th birthday for any purpose, but the Government bonus, together with any interest or growth thereon, will be lost. A 5% charge will also be payable.

This article is for general information only and professional advice should be taken before making any investment decision.