Individual Savings Accounts (ISAs), available to UK residents with a UK address, hit the spotlight again in the March Budget, with a New ISA (NISA) being introduced on July 1 this year.
The annual contributions allowance will increase to £15,000 and may consist of any investment mix between stocks and shares or cash. It will also be possible to transfer between the two account types without limitation.
Previously, only 50% could be held in cash and while transfers between cash ISAs or from cash to stocks and shares were possible, a transfer from stocks and shares to cash was not.
I have to say, I am not a fan of cash ISAs at present – with such low interest rates, the tax saving potential is minimal. But, rates will go up and in due course, they may even reach a level where they could be considered reasonable again!
For those who are eligible to subscribe to ISAs, the changes are very good news and the magic is simply that for UK taxpayers, any gains made or income paid out, will be totally tax free in the hands of the investor.
We have come a long way since the introduction of Personal Equity Plans, (the forerunner to ISAs) by Nigel Lawson in 1986. Today, many people enjoy tax-free ISA accounts with six figure balances and they form a valuable part of retirement income planning.
A common myth however, is that an ISA retains its tax-free status for expats, if it was accrued prior to leaving the UK. Sadly this is not the case, as the rules that apply in the new country of tax residence will prevail.
For example, if you are now a Spanish tax resident and you have an ISA in the UK, you will need to provide details of gains and income when completing your Spanish tax return at the end of June each year and depending on your circumstances, there will probably be some tax to pay. Potentially, you could even end up paying tax on gains that were built up while you were a UK resident, when they would have been tax-free!
I am sorry to say that Spanish ISAs do not exist and therefore there is no direct comparison available. That said though, there are some interesting alternatives, offering attractive returns for sums invested between €25,000 and €1.5 million for cautious investors, with no upper limit for the more experienced.
Choosing the right investment company, which has fiscal representation in Spain, can also remove the necessity for these funds to be reported on M720 returns each year.
While the gains and income from this type of investment are not tax free, they do enjoy a particularly favourable tax treatment in Spain, which only applies when money is withdrawn and consequently, they can be a very creditworthy option to consider as part of your overall financial planning.
Current cash ISA rates actually REDUCE ones savings. The derisory interest on even the best ones, doesn’t come anywhere near compensating for inflation. It is possible to make a few groats on a stocks and shares ISA, but people are mighty nervous about leaving their hard-earned with organisations that have already proved to be no better than pirates.