by Andrew Porter

Created on: October 29, 2008

The rules for Individual Savings Accounts (ISAs) have changed this tax-year, so I thought it was time to review this valuable tax-avoidance scheme.

ISAs are little more than an official tax-wrapper into which other investments may be hidden from the tax-man. Each tax year every adult has an allowance of 7,200, increased from 7,000 last year and cash, shares, unit-trusts and investment trusts may be held inside this tax wrapper. Cash is treated differently to other investments in that there is a maximum of 3,600, up from 3,000 last year, but if you use the cash allowance, the remainder may be made up of the other types of investment.

Apart from the increase in allowance from 7,000 to 7,200 (and 3,000 to 3,6000 for cash ISA) the other changes are that now any money held in a cash ISA may be transferred to the equity part of the ISA at any stage in the future. Previously ISAs were far more complicated and you had to either opt for, up to 7,000 in a "Maxi" Equity ISA, or up to 3,000 into a Mini Cash ISA and up to 4,000 in a Mini Equity ISA and then you were stuck with that forever (although Cash ISAs from previous years may also be transferred now) There is a catch however: You cannot move the money back to a Cash ISA at a later stage. You can however keep cash in the equity part of the ISA, but it must be for future investment and is not tax-free. Overall ISAs are now simpler and slightly more useful.

Equity ISAs are not completely tax-free, but they are better than almost anything else on the market. Cash ISAs are completely tax-free, in that all interest is paid gross, although you have to check the rates are competitive, because you probably don't want to keep moving your money. The Equity part of the ISA is more complicated in that payments from bond funds (corporate bonds or gilts) are classed and interest and therefore tax-free, whereas true equity investments (such as share funds, investment trusts; OIECs and unit-trusts) no longer have the dividend tax credit refunded, so tax on company dividends, which are taxed at source, cannot be reclaimed by the ISA to make them truly tax-free (this is complicated and not understood buy most, so Gordon Brown removed this in one of his many "stealth" taxes) This is effectively a 10% tax on dividends.

ISAs are capital gains tax (CGT) free, although there is a personal allowance for CGT of 9,600 for 2008/2009 which means there is no tax advantage unless you are a 40% tax payer, or you are going to make a significant capital-gain.

The

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