Requirements to invest in an ISA
You can invest in an ISA provided:
You are aged at least 18 (16 for cash ISAs only); and
You are resident and ordinarily resident in the United Kingdom for tax purposes; or
You are a non-resident Crown employee (eg a member of the armed forces) or his or her spouse.
Tax advantages of an ISA
There are currently three major tax advantages to investing in an ISA:
Income tax - Following the removal of the 10% dividend tax credit on 6 April 2004 there is no income tax advantage for basic rate tax payers from holding equity funds within an ISA. However, higher rate tax payers still benefit as there is no further tax to pay inside an ISA. Interest distributions from bond and gilt funds currently remain tax-free within an ISA as the 20% tax can continue to be reclaimed by the Account Manager.
Capital gains tax - All gains within your ISA are free of capital gains tax.
Tax returns - Normally income and capital gains from ISAs do not have to be reported on your tax return.
There is no minimum investment period needed to qualify for these tax benefits.
Maxi ISAs and Mini ISAs
In April 2008, Mini and Maxi ISAs were replaced by Cash ISAs and Stocks and Shares ISAs. Mini Cash ISAs and the cash components of Maxi ISAs were reclassified as Cash ISAs. Mini Stocks and Shares ISAs and the stocks and shares components of Maxi ISAs were reclassified as Stocks and Shares ISAs.
The definition of stocks and shares (for a Stocks and Shares ISA) can include unit trusts, investment trusts, open ended investment companies, investments on any recognised stock exchange, corporate bonds, shares held in a savings related share option scheme and gilts. Whereas, a Cash ISA can include bank & building society accounts, cash unit trusts, national savings products (excluding national savings certificates and premium bonds) and money market deposits.
Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.