Individual Savings Accounts

An individual savings account or ISA is not product on its own, but a tax wrapper around a savings or investment product which protects your interest from being taxed in your hands.

Tax-free savings account

An ISA is an Individual Savings Account that allows you to save or invest your money without paying tax on the interest or on the investment returns you receive.

To open an ISA, you need to be a UK resident for tax purposes and aged 16 or over. For some ISAs, you may need to be 18 or over.

Your yearly allowance

For each tax year, there is a limit to the amount you can deposit into your ISA. The limit for the 2014/2015 tax year is £15,000. You can only open (or subscribe to) one cash ISA and one investment ISA in each tax year. You can transfer in money from old ISAs into your current ISA if you would like to keep all your ISAs in one place.

Tax-free interest and capital gains

The tax year runs from 6 April to 5 April. If you choose not to open a new ISA, you can top up your existing ISA with lump sums, regular payments or as and when you are able, until you reach the allowance for that tax year – depending on your ISA. You will continue to earn tax-free interest on your combined balances year after year and you will not be liable for capital gains tax on any growth from an investment ISA

Cash ISA and investment ISA

You can choose to either put your allowance of £15,000 into a cash ISA, an investment ISA or both.

Inheritance Tax

One disadvantage of ISAs is that they form part of your estate on death and so are potentially subject to inheritance tax.  However, it is possible to invest in AIM shares that qualify for business property relief.  This means that you can now have an ISA that gives you tax-free growth and income while you are alive and won't leave your children with an inheritance tax headache once you're gone.

However, these investment are at the high end of the risk scale and should only be entered into after good advice.