Investments & Taxation
Individual Savings Accounts (ISAs): planning ideas
Last Updated: 6 Apr 26 2 min read
Contents
1. Maximising ISA subscriptions
4. 'Bed and breakfasting' and ISAs
5. Tax free income - using a client's ISA allowance efficiently
Maximising ISA subscriptions
- How to meet the tax-year-end deadline with last-minute subscriptions.
- ‘Bed and breakfasting’ anti-avoidance rules don’t apply to ISA wrappers.
Last-minute subscriptions
Investors who leave their annual ISA subscriptions to the end of the tax year need to be mindful that an ISA begins from the later of:
- the date on which the ISA manager accepts the application form, and
- the date on which the subscription is made.
ISA subscription dates
- By cheque – the date on which the cheque is received and accepted by the ISA manager provided it clears in due course.
- By direct debit – where the ISA manager can subsequently draw on that, the subscription is made on that later date, provided the cash transfer takes place in due course.
- By debit card, charge card or credit card – subscription is made the date on which authorisation is given by the investor.
- By standing order – where the instruction pre-dates the date on which the first payment is due, then subscription is made on that later date, provided the cash transfer takes place in due course.
- By telegraphic transfer – if the investor transfers the funds directly, the date on which the subscribed funds are received by the ISA manager.
An ISA manager may therefore accept an application before a subscription is made, but if he does the ISA does not begin until a subscription is made.
'Bed and breakfasting' and ISAs
The term ‘bed and breakfasting’ is used generally to cover arrangements in which a person sells shares or units only to buy back those of the same class a short time later. The purpose is to create a disposal for capital gains tax purposes but to regain ownership. This may be to realise a loss, which can then be set off against other gains or establish a higher base cost for the asset. TCGA 1992 S105(1) however provides that a disposal must be identified with the acquisition of share/units of the same class within 30 days. This has the effect of reducing or eliminating the gain or loss which would have arisen if the disposal had been identified with shares already held. If however the re-acquisition is within an ISA wrapper then this anti-avoidance rule doesn’t operate, since the capacity of the seller and the purchaser is not the same – i.e. individual sells but ISA manager acquires.
Maximising Tax free income –using a client’s ISA Allowance efficiently
Where a client’s with an ISA portfolio and investments outside the ISA relies on income from their investments to top up their income so it meets their needs it is worth considering how investments are allocated across the wrappers they hold to minimize their tax liability.
As an example Michael has the full state pension of £12,548 and a pension annuity of £6,000 per annum. He has £40,000 in a savings account paying 4.5% interest. He also has £100,000 in an ISA currently in funds focused on growth, and equity income funds of £100,000 held in a General Investment Account . The yield from the accumulation units in his ISA is currently 1.8% per annum (£1,800) which is tax free and automatically reinvested into the funds. The yield from the income funds he holds outside his ISA is 4%, (£4,000). The dividend income from his GIA exceeds the dividend nil rate band by £3,500 creating an income tax liability of £376.25 (£3,500 x 10.75%) .
Can Michael’s investments be more tax efficient if (subject to CGT allowances in his GIA) he allocates his ISA to income funds and his GIA to growth funds? Yes, he would benefit from the £4,000 yield from the income funds then held in his ISA without paying dividend tax on it. He would pay tax on the £1,300 of the yield declared in growth funds that held in his OEIC (the excess above the dividend nil rate band), giving him an income tax liability of £139.75 (£1,300 x 10.75%).
By allocating the funds held in his ISA to provide income and moving the funds in his general investment account to lower yielding funds he saves £236.50 of income tax (£376.25-£139.75).
Prior to the end of tax year Michael could then consider using some of his ISA allowance to invest in a cash ISA so that the interest on his savings remains within the personal savings allowance and using any excess in his ISA allowance to bolster the income focused holdings in his stocks and shares ISA. N.B. From 6 April 2027 the cash ISA allowance is reducing to £12,000 within the main ISA allowance for those under the age of 65 .
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