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How to make the most of an ISA

If you’re looking to reduce your tax bill, as well as remain flexible in terms of making withdrawals and deciding where to invest, you are likely to have at least considered an ISA.

While this may be the case, it’s a good idea to build an understanding of how ISAs work before depositing your hard-earned cash.

Read on to find out how to make the most of an ISA to improve your financial situation.

Opening an ISA

In most cases, opening an ISA is a simple process that can be completed online in a few minutes. It is a good idea to search for the best deal in terms of costs and potential returns through comparison sites such as The Motley Fool.

Details such as your financial position and current account details will be needed when opening an ISA. Once opened, money is deposited through a debit card or through a bank transfer.

Deciding where to invest

The type of ISA that you open will have a big impact on where your money is invested. A cash ISA, for example, will accumulate interest on a cash balance. For other ISAs, such as a stocks and shares ISA, it is possible to invest in a wide range of assets.

Therefore, it may be a good idea to take some time to research the variety of options available in order to find the best place to invest. This is likely to be based on factors such as your risk tolerance and desired potential returns.

For example, risk-averse investors may be more interested in a cash ISA due to there being no prospect of losing money. However, its returns can be relatively low. Therefore, if you are comfortable with taking more risk in order to potentially earn a higher return, a stocks and shares ISA could be of interest to you.

Reducing your tax bill

An ISA may reduce your tax bill by sheltering money from taxes such as income tax, capital gains tax and dividend tax. All money invested in an ISA is not subject to these three taxes, which is a key differentiator between an ISA and other types of accounts such as a savings account or a sharedealing account.

Taking advantage of an ISA’s tax benefits is fairly straightforward. Any interest, dividends or capital gains earned on money deposited in the account is not subject to tax. Therefore, you do not have to take any special measures to avoid tax beyond using your ISA, which makes an ISA a simple means of reducing your tax bill.

Transferring an ISA

Transferring an existing ISA account to a new provider is relatively straightforward. Doing so may allow you to take advantage of lower costs or a better return, for example.

For money paid into an ISA in previous years, you can choose to transfer all or part of it to a new provider. However, for amounts paid into an ISA in the current year, you must transfer all of it.

There may be restrictions on transferring some assets held, as well as a charge for doing so. It is worth checking with your existing provider regarding both of these areas.

Inheriting an ISA

Upon death, ISAs can be passed to a spouse or civil partner without being subject to inheritance tax. The value of the ISA being inherited is added to a spouse or civil partner’s annual allowance for the year in question, which means they do not pay any inheritance tax.

For example, if the value of the ISA being inherited is £50,000, their annual allowance will be £70,000 for the year in which their spouse or civil partner died.

ISAs that are not transferred to a spouse or civil partner will be added to the deceased’s estate. They will then be subject to inheritance tax as per any other asset within the estate.

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