ISA Goodun'!
Over the last few years there’s been quite a lot of talk regarding the future of ISAs, and whether they are worthwhile investing into now that the 10% tax on dividends is no longer reclaimable. On the first issue, the Chancellor has now confirmed that ISAs will continue beyond 2010, which is good news because on the second point regarding the tax efficiency of ISAs, they are still a very attractive market-backed investment. The reason for this is that they are still free of any Capital Gains Tax (CGT) and income received does not have to be declared on any tax return: making the income effectively free of Income Tax.
To put this in perspective, let’s take the issue of CGT. For client’s investing in new ISAs for the 3 months up to April 2007, the most popular fund on theinvestorcentre.com was Neil Woodford’s INVESCO PERPETUAL High Income Fund. If, for example, you had invested £7,000 into the High Income Fund on the first day of the new tax year for each of the last 5 years (i.e. 6 April 2006, 6 April 2005, 6 April 2004 and so on), you would have an ISA pot valued at £66,598 (source: Financial Express, 18/04/07, based on bid to bid, income reinvested) for a total investment of just £35,000. Based on personal allowances and CGT bands for the current tax year (2007/08), one would have a total taxable gain of £19,038, which is equivalent to a tax bill of £7,615.32 for higher rate or £3,807.60 for basic rate taxpayers. When viewed like this, it is clear that ISAs provide the potential for some quite considerable tax savings.
The previous uncertainty and the perceived loss of tax efficiency have led to a decrease in the level of ISA sales over recent years; so too did the stock market fall from 2000-2003. This year, however, we’ve noticed a marked improvement on last years ISA season. With other firms in our industry saying that they’ve had a disappointing level of ISA investment, it seems that the launch of theinvestorcentre.com and the incorporation of Cashback into a monthly payment has been attractive to many investors.
Naturally, I’m pleased to say that the launch of theinvestorcentre.com has been a success for our company, but I think that the reasons for the success illustrate a wider point. Investors expect a type of service from their IFA now that wouldn’t have been possible 5 years ago. Back then internet banking was still relatively new (smile.co.uk, the UK’s first, was only launched in October 1999). Now, however, we are all familiar with the possibilities available to us online, both as a facility to access our finances and as a tool to conduct our own research. I hope that we will be able to continually improve and build on the successes of theinvestorcentre.com and that next ISA season will be even better.
But one final point. If the investor in the example used above had waited until the last day of the tax year to make their investment, instead of making it straight away, their investment into the same fund, on the same basis would be worth £59,745 (i.e. £6,853 less), so the lesson is: why wait?