There are now a variety of ISA investment options available to meet different needs. We are pleased to set out some of the basic elements of each ISA element.

ISAs of all types are designed to allow you to invest such that gains or income are not subject to either capital gains or income tax. Each type of ISA has different allowances, access and restrictions/options, investment arrangements, contribution limits and terms. They are available only to residents of the UK or to Crown employees and their spouse based overseas.

The contribution limit is up to a maximum of £20,000 per person for the tax year 2017/18. For a child, the maximum is £4,128 each tax year.

Types of investments

The types of ISAs available are as follows:

General ISA (sometimes referred to as a NISA – New Individual Savings Account)

The traditional ISA has been around now for many years, but had some changes made by the government which gave it the name NISA. The main change was that the amount you could contribute was raised substantially a couple of tax years’ ago as a means of encouraging people to save more.

These are available to those aged 16 and over when investing in cash and 18 and over when investing in other assets. The ISA limit can be invested in any of the following investment types up to the maximum annual allowance:

• cash (deposits or holdings in collective cash deposits
• stocks and shares (in individual listed companies or a collection of stocks through a fund)
• life insurance funds (investing in funds of a life office)
• fixed term bonds and structured products.

You can have a combination of cash and stocks and shares with no fixed amount needed to be held in each element (in the past there were restrictions).

These are accessible at any time with no penalty and you can request the sale of your funds at any time subject to any timescales that relate thereto in selling. Since 6th April 2016, you can draw funds from your ISA in a tax year and reinvest them again within the same tax year without affecting the annual contribution limit.

This ISA can be held for life with no end term.

Death – what happens to your ISA

On death of the investor, in all cases, the ISA forms part of the deceased person’s taxable estate and may be subject to inheritance tax depending on the total estate value at that time. Inheritance tax rates may apply and reliefs may be available.

However, if a person dies leaving a spouse after December 2014, the ISA account and all the tax benefits can be passed to the spouse and continue until they pass away when the account will then lose the tax benefits of the ISA. Transfers between spouses on death do not incur inheritance tax.

Should a young person be terminally ill, then there is the possibility of closing their ISA.

ISA investments may form part of your estate on death and will potentially be subject to inheritance tax, but this will depend on the type of asset within certain types of ISA.

Lifetime ISA (LISA) – launched April 2017

This new initiative will run alongside the Help to Buy ISA until 2019 with investors able to invest in both schemes but only able to apply for the government bonus on one account. A LISA is only available to those aged between 18 and 40 years of age.

The new LISA combines the traditional ISA and Help to Buy ISA in that there is an annual contribution allowance of £4,000 per tax year, which forms part of the new ISA allowance of an overall £20,000 per year from April 2017. You can therefore have a contribution of all of the above ISAs to this maximum limit.

Each tax year you would effectively start a new LISA.

The new LISA is designed to be used for either a first house purchase or retirement and the government will contribute a maximum of 25% as a bonus each year for those aged between 18 and 50 years (therefore limited to a maximum of £32,000 of bonus per person throughout the life of the investment). Therefore, if you fully fund this account of £4,000 each year the government will add a further £1,000 per annum between these ages.

Unlike the Help to Buy ISA you can hold stocks and shares and the government bonus is applied annually at the end of the tax year, not when you buy the property or reach the set retirement age of the scheme at 60 years old.

As with the Help to Buy ISA, to qualify for this scheme and its bonus, the house purchase price is limited to £450,000 irrespective of where in the UK.

Access is available at any time to the whole fund within the ISA, but if sold before aged 60 and not for a house purchase as above, a penalty of 25% will also be charged on the amount drawn.

The LISA can be held for the life of the account holder as with a general ISA.

Help to Buy ISA

Launched on 1st December 2015, again another government initiative aiming to help the next generation of home buyers to reach the property ownership ladder.

Only one account per person is allowed and unlike a traditional ISA, you open an account and contribute to this continuously rather than restarting each tax year. But you cannot contribute in the same tax year if you have invested in another cash ISA. This is because the Help to Buy ISA allocation is in place of your permitted allocation to a cash ISA.

Contributions are limited to an initial payment of £1,000 and then monthly payments to a maximum of £200 per month for a maximum of 13 years.

The government will apply a bonus of 25% to your savings when you come to purchase your property and the payment is claimed by your solicitor at that time. So, for every £200 per month saved, an additional bonus of £50 is available. The maximum government bonus you can achieve is £3,000 and is based on the value when you come to claim.

There is a further restriction, the house purchase price is limited to £250,000 outside of London and £450,000 in London.

The only investment option within these accounts is cash.

Access is at the time of purchasing your property. Early closure can be arranged but no government bonus would be applied.

An account can be opened within the next four years with the scheme set to close at the end of November 2019. Existing accounts can then be held and contributed to until 2029.

In addition to this ISA, you can open a generic ISA to make your total payments to an ISA for the year up to £20,000.

Innovative Finance ISA (available as an alternative investment within a general ISA)

An initiative by the government to provide the opportunity to expand the investment opportunities in an ISA with the addition of peer to peer lending availability within the wrapper. This is referred to as an Innovative Finance ISA (IF ISA).

The fund within the account is classed as peer to peer lending whereby your funds are pooled with other investors and lent to various businesses for development. The loan is repaid at some point in the future and when this happens you funds are then loaned once more until such time as you cease to be an investor in the arrangement because you have either closed the account or transferred the ISA to another arrangement.

From 6th April 2016, the government changed legislation to allow you to hold this type of investment and receive the benefits within the account tax free.

The idea is to help peer to peer lending in a more formal manner than we have seen in the past and to be regulated by the Financial Conduct Authority at a greater level.

Combination of ISAs

You can invest in a combination of Innovative Finance ISAs, cash ISAs and stocks and shares ISAs each year as long as you do not exceed the total annual contribution allowance.

Junior ISAs (JISA) – this is a separate allowance for children 

Junior ISAs replaced the Child Trust Fund (CTF) scheme a few years’ ago and are for parents to invest for their children under aged 18 years.

If your child has a Child Trust Fund, then you cannot have a JISA until the CTF is converted to a JISA.

Contributions are limited to £4,128 per tax year per child and you can hold cash or stocks and shares within the arrangement.

Access by the child is from 18 years but they take control from 16 years if the assets within the account are cash. Please note that whilst a stocks and shares ISA is still managed by a parent until the child’s 18th birthday, they will be notified of the investment from 16 years of age.

There are no tax implications on the parent when investing in a JISA.

Between ages 16 and 18 years, a child can invest in a normal ISA as well with cash up to £20,000 providing a window to increase the ISA allowance for the child for these two years to £24,128 only. At aged 18, the JISA converts to a general ISA and terms and access are then based on this regime as noted previously.

No government incentives are awarded to these accounts, unlike the old Child Trust Fund arrangement or the new LISA.

Investment risks to consider

There are a number of risk considerations that need to be taken into account. It is important that you are aware of these in relation to your particular circumstances. This document is for guidance only and does not constitute financial advice. Please speak to a member of our team to discuss your specific needs so we may make a recommendation to you. When investing, please be aware that:

• governments can and do change the rules on tax efficient vehicles, like ISAs
• if you leave the UK and are no longer a UK resident, then you can keep the ISA investment with its tax advantages but cannot make any new contributions to the ISA
• ISA investments are potentially liable to inheritance tax on death (except those eligible for business property relief)
• income tax deducted at source on foreign dividends may not be recoverable
• there are no further income or capital taxes to be paid on investments held within an ISA
• some assets held within ISA accounts can also become free of inheritance tax

In addition to the risks applicable to ISAs generally, the following also need to be considered in relation to loan-based peer to peer agreements held within an Innovative Finance ISA:

• there are likely to be tax consequences if you wish to withdraw a P2P agreement from an IF-ISA or if (where the option is available) you request to transfer all or part of your IF-ISA from one ISA manager to another
• transfers can only be made once outstanding loans have been repaid as cash
• it may not be possible to sell or trade P2P agreements at market value on a secondary market.

When making an investment other than cash in your ISA:

• the value of this investment is not guaranteed and on encashment you may not get back the full amount invested
• when purchasing units, please be aware that the price of units can fall as well as rise
• past performance is not necessarily a guide to the future and the value of your investments can go down as well as up
• you may receive back less from your investment than you have paid in.
• as a regulated investment, you have protection through the Financial Services Compensation Scheme (FSCS), however, in the event that the P2P platform operator fails at this time, there is no protection for this event.