Individual Savings Account (ISA)
The Basics
Introduced in April 1999 the ISA was designed
to replace the Personal Equity Plan. These tax-free
accounts were split into two main alternatives,
the Mini ISA and the Maxi ISA, both of which can
be utilised to repay an interest only mortgage.
The Maxi ISA combines three basic elements in
one plan, with a limit of £5,000 (£7,000
in the current tax year) being placed on the investment.
The elements incorporated within the plan include
cash, stocks and shares as well as insurance elements.
Only one Maxi ISA may be held in any one tax year.
Mini ISAs are also divided into the same three
areas although only one of the investment areas
may be held in each policy. The maximum limit
is £1,000 (£3,000 in the current tax
year) for stocks and shares and cash, with the
insurance element being £1,000 immediately.
An investor may only hold one of each Mini in
any tax year.
It is not permissible for holders of a Mini ISA
to open a Maxi ISA and vice versa. Investment
managers may only be changed on an annual basis.
It should also be noted that whilst a Maxi has
a single investment manager for all three elements
the Mini ISAs will have an individual manager
per element therein. It should be noted that the
ISA is a relatively new product and as with any
piece of new legislation there is always some
degree of uncertainty over its long term future.
No further funds can now be put into Personal
Equity Plans.
Advantages
The tax advantages of the ISA allow you to receive
tax-free returns. The freedom to make additional
payments up to the annual limits. The opportunity
to take payment holidays without incurring large
penalties. The opportunity to access the investment
proportion of your mortgage in the event of financial
difficulties.
Disadvantages
Holders of a Mini ISA cannot take out a Maxi,
and vice versa. There are limits applied to all
contributions. Switching between provider can
only be completed on an annual basis and penalties
may be incurred. The increased flexibility inherent
within the repayment vehicle can lead to shortfalls
in relation to the amounts required owing to withdrawals
having been made.
Suitability
An ISA linked mortgage is the most suitable option
in a number of circumstances the most common being
those identified below:
- This option is suitable for individuals willing
to take some degree of financial risk.
- Higher rate taxpayers may benefit from this
option.
- You believe that the investment market over
the period of your mortgage is likely to generate
a cash surplus over and above that required
to repay the mortgage
- You are not looking for a guarantee of repayment
at the end of the mortgage term
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