ISA changes from April 2008

Article date: 20.03.08

There will be a number of significant changes to the rules for ISAs taking place from 6th April 2008.

The distinction between mini and maxi ISAs will no longer exist and you can invest in Cash and Stocks and Shares ISAs with different providers in the same tax year. The annual allowance figure will be raised from £7,000 to £7,200 of which, up to £3,600 can be saved in a Cash ISA (an increase from £3,000).

You will also be able to maximise contributions by investing any unused cash investment, into a Stocks and Shares ISA.  For example, if you invest £1,600 into a cash ISA with one provider, you can invest up to £5,600 into a Stocks and Shares ISA with another.

Transfers

You will be able to transfer existing Cash ISAs into Stocks and Shares ISAs.  This will not affect your allowance in the year of transfer.  However you will not be allowed to transfer money in existing Stocks and Shares ISAs into cash ISAs.  Money in Child Trust Funds (CTFs) can be transferred into an ISA when the child turns 18, at no extra cost.

Personal Equity Plans & Tessa Only ISAs

Existing Personal Equity Plans (PEPs) will be redesignated as Stocks and Shares ISAs, while existing TESSA only ISAs (or TOISAs) will be redesignated as Cash ISAs.

Tax

There are no changes to the tax position of ISAs. Stocks and Shares ISAs will continue to grow free of capital gains tax (CGT) however, tax paid on dividends cannot be reclaimed by the ISA providers unless generated by holdings such as gilts and corporate bonds. Any interest paid on uninvested cash will be net of income tax at 20%.

One change that has a negative impact on PEPS is that any uninvested cash held prior to 6th April 2008 has had interest paid gross however, once redesignated as Stocks and Shares ISAs they will be paid net of income tax at 20%.

Interest paid on Cash ISAs will continue to be tax free.  There are no tax consequences to the investor when money is drawn out of an ISA, however the funds cannot be re-invested into the ISA over and above your annual allowance.