• ISA investors up against the deadline can ‘Park & Glide’
• No need to part with cash - use Bed and ISA
• Get a head start on next year with an Early Bird ISA
• Protect your income stocks with an ISA
• The £29,000 Junior ISA loophole
Laith Khalaf, financial analyst at AJ Bell:
“The end of the tax year is nigh, which means legions of last minute ISA investors will be rushing to use up their allowance before it disappears for good. This year could be a bumper year for ISAs, seeing as many people have saved so much cash over lockdown, and tax thresholds have been frozen from next year, so from then on, most people will be subject to higher tax.
“With so little time to play with before the 5th April deadline, investors need to make sure they don’t make any rash decisions. There are a number of tried and tested ISA hacks which could help investors at this frantic time of year. Probably the most important is to realise that you can take out a stocks and shares ISA for this tax year, but hold off making an investment decision until you’ve had some time to think about it.
You can hold your ISA contribution in cash initially, then give an instruction for money to be drip fed into the markets gradually. This ‘Park & Glide’ approach buys you some time, and smooths out the ups and downs of the market through regular investment.”
Last Minute ISA Hacks
1. Park & Glide
Many investors will now be rushing to use their ISA allowance before the end of the tax year, but making investment decisions in a hurry isn’t a great idea. However, the Stocks & Shares ISA rules allow you to contribute in an ISA for this tax year, and hold it in cash beyond the 5th April, until you are ready to invest. So you can secure this year’s allowance, but don’t have to choose an investment in your Stocks & Shares ISA right away.
When you do come to invest you can also give an instruction for your money to be drip fed into your chosen investments on a monthly basis. Doing so will smooth the ups and downs of the market, and protect you from any near-term sell offs, because if the market falls, your fresh monthly investments will simply buy in at lower prices. So you can make the most of this year’s ISA allowance, park it in cash, and then use a monthly investment plan to glide through next year.”
2. Bed and ISA
If you don’t have any spare cash lying around to put into this year’s Stocks & Shares ISA, then you can use your allowance to wrap up other investments you hold in the tax shelter. By conducting a ‘Bed and ISA’, investors can sell shares, then immediately buy them back within an ISA wrapper, thereby protecting them from future income and capital gains tax. You don’t have to keep the same investment if you think it’s run its course either, you can buy a new fund or shares in the ISA with the proceeds of the sale.
You might need to be slightly wary of Capital Gains Tax, because the sale of investments before you put them in an ISA is a chargeable event for CGT purposes. But each year you have a CGT free allowance, in this tax year that allows you to make £12,300 of gains before paying any capital gains tax. The maximum you can put into an ISA is £20,000, so provided you paid more than £7,700 for the shares you’re selling, the £12,300 capital gains allowance should mean you have no CGT to pay on the disposal, assuming you haven’t made any other gains throughout the tax year. If the investment you’re selling has performed better than this, then you can simply scale back the amount you Bed and ISA to stay within the £12,300 Capital Gains Tax allowance.
3. Early Bird ISA
They say the early bird catches the worm, but when it comes to ISAs, the early bird saves themselves going through the same mad rush next year. The current tax year ends on midnight on 5th April, and a new tax year starts right away on 6th April, so as well as taking care of this year’s ISA, you can set up a regular saving plan for next year, killing two birds with one stone.
Getting a regular savings ISA sorted for the 2021/22 tax year means your money will be invested in the market every month throughout the tax year, so you won’t face the same pressure this time next year, to beat the ISA deadline. It also means your money will be drip fed into the market, making for a smoother journey. Monthly ISA contributions are made directly from your bank account, which takes the faff out of saving. It also takes the emotion out of investing, because your money is automatically placed into the market each month.
4. Protect your income stocks with an ISA
If you have a large investment portfolio outside of an ISA, then you need to give some thought to which assets to hold in the ISA, and which to hold outside. The ISA gives you protection from capital gains tax and income tax on dividends, but it’s the latter which is probably more valuable. That’s because the annual CGT free allowance is quite generous, as £12,300 of gains can be made tax-free each year. By contrast, the annual tax-free dividend allowance is £2,000.
Investors can also control the timing of gains, because they only arise on sale, whereas dividends are paid by companies at certain points throughout the year, irrespective of whether they land at a bad time, tax-wise, for investors. So it typically makes sense to wrap income-producing investments in the tax shelter, and keep the more growth-orientated assets outside. Over time, you can use a Bed and ISA to bring those investments into the ISA wrapper too.
5. The £29,000 Junior ISA loophole
It’s a weird quirk of the tax system, but 16 and 17 year olds actually have the most generous ISA allowances of all. That’s because as well as the £9,000 Junior ISA allowance, they can also contribute £20,000 to an adult Cash ISA. Wealthier families with spare cash might consider taking advantage of this loophole, while turbo boosting their kids’ savings plans at the same time. If you’re investing for the long term, the Cash ISA element can be transferred into a Stocks & Shares ISA from age 18.