TD Direct Investing A Guide to ISAs

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1 TD Direct Investing A Guide to ISAs

2 Introduction The aim of this guide is to explain how an Individual Savings Account (ISA) works and the benefits to investors. We offer our services on an execution-only basis with opinions provided by TD or one of our partners in some circumstances on whether to buy a specific investment. Please note that none of the opinions we provide are a personal recommendation, which means we have not assessed your investing knowledge and experience, your financial situation or your investment objectives. This eguide is intended for educational purposes only and as such is not a solicitation or recommendation to make an investment based on the contents of this presentation. We are unable to give tax advice. If you require any further assistance in this area please seek independent tax advice from an appropriate tax professional or contact HMRC. Investors should be aware that the value of your investments can go down as well as up. You may not get back all the funds that you invest. If there is any doubt over the suitability of a particular investment then you should seek independent advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. The information within this guide is based on our understanding at the time of writing. Version April ISA Quick Facts What is an ISA? How popular are ISAs? What are the tax benefits? How much can I invest in an ISA?

3 ISA Quick Facts ISA limit 15,240 Your annual ISA allowance is 15,240 (for tax year 2016/17). Flexibility Cash Stocks and Shares You can split your 15,240 allowance as you wish between Cash or Stocks and Shares. Transfer options You can transfer a stocks and shares ISA to a cash ISA and vice versa. Previously you could only transfer a cash ISA to a stocks and shares ISA and not the other way round. No tax on cash held in a stocks & shares ISA If you earn interest on cash held in a stocks and shares ISA this is not subject to tax charges. More choice of what to invest in You can now invest in qualifying short dated bonds and gilts with less than 5 years to maturity. Previously these were not allowed in an ISA. 3 ISA Quick Facts What is an ISA? How popular are ISAs? What are the tax benefits? How much can I invest in an ISA?

4 What is an ISA? In a nutshell, an ISA is an account that allows you to hold investments or cash without having to pay tax on any profit made or further tax on income received within the ISA. You can open an ISA if you re 18 years old or over, or from 16 if you just hold cash. You also need to be a UK resident for tax purposes. How popular are ISAs? Since their launch in 1999, there are over: 22.7 million ISA holders Of which: 11.0 million are male 11.6 million are female ISA holders by age: Under and over 1.42m 3.18m 3.46m 4.19m 4.21m 6.21m Statistics based on latest HMRC statistics up to tax years ISA Quick Facts What is an ISA? How popular are ISAs? What are the tax benefits? How much can I invest in an ISA?

5 What are the tax benefits? If you re investing, at some point you will sell your investment hopefully at a profit. The profit you make is known as a Capital Gain which can be subject to Capital Gains Tax. In addition to profit, you may also make money on your investment or savings through income such as interest on cash, or dividends on shares, which might be subject to tax. If you save or invest within an ISA: n You do not have to pay Capital Gains tax on any profit made within the ISA n You don t pay further tax on any income received in the ISA n You don t have to declare ISAs on your tax return It s worth noting that any losses on investments within your ISA cannot be offset against Capital Gains made outside your ISA. 5 ISA Quick Facts What is an ISA? How popular are ISAs? What are the tax benefits? How much can I invest in an ISA?

6 What are the tax benefits? Why it pays to invest in an ISA... In this simplified illustration three investors sell investments and each makes a profit (Capital Gain) of 14,000. The current annual exempt amount for Capital Gains is 11,100. This means any profit over 11,100 is subject to Capital Gains Tax. 14,000 Total realised capital gain 11,100 Annual exempt amount 2,900 Taxable The first two blue investors made their profit in an account without tax benefits and pay tax on their profit through their tax return. One pays the higher rate of capital gains tax at 20% and the other pays the basic rate of 10%. 13,420 Profit kept after higher rate Capital Gains Tax 580 Tax paid 20% higher rate Capital Gains Tax 13,710 Profit kept after basic rate Capital Gains Tax 290 Tax paid 10% basic rate Capital Gains Tax The green investor made their profit by selling investments within an ISA and doesn t pay tax on this amount or have to declare this in a tax return keeping all the profit for themselves. 14,000 Profit kept if realised within an ISA TAX FREE Please remember that tax treatment depends on your individual circumstances and other exemptions, losses or reliefs may be applicable and might affect the tax you pay. This illustration assumes the full Annual Exempt Amount is available. Source: 6 ISA Quick Facts What is an ISA? How popular are ISAs? What are the tax benefits? How much can I invest in an ISA?

7 How much can I invest in an ISA? Everyone gets an annual ISA allowance which is the maximum amount you can invest in an ISA each tax year. The current annual allowance is 15,240. Normally this amount will increase in-line with inflation each tax year. A key point to remember is that if you don t use your annual allowance you will lose it as you can t carry forward unused allowances. 7 ISA Quick Facts What is an ISA? How popular are ISAs? What are the tax benefits? How much can I invest in an ISA?

8 Additional Permitted Subscription (APS) allowance Since 3 December 2014, where a person holding an ISA dies and that person was married or in a civil partnership, the surviving spouse/civil partner is entitled to an extra ISA allowance equal to the value of the ISA(s) held by their spouse/ civil partner (even where the spouse/civil partner does not actually inherit the ISA). This is referred to as the Additional Permitted Subscription (APS) allowance. This allowance can be used with the ISA provider of the deceased or an ISA provider chosen by the surviving spouse/civil partner. It can be used with stocks and shares held in an ISA of the deceased which can be passed to an ISA of the spouse/civil partner without needing to be sold. Where the deceased held multiple ISAs with different ISA providers there will be a separate APS allowance with each of the ISA providers. The APS allowance is not something which can be transferred to another person. Who is eligible for an APS allowance? Anyone whose spouse/civil partner has died on or after 3 December 2014 and at the date of death were: Married or in a civil partnership Not legally separated 16 years of age or over Customers who have moved abroad will be entitled to claim the APS allowance. APS allowance is available for three years after the date of death, or for up to 180 days after administration of the estate is complete, whichever is the later. 8 ISA Quick Facts What is an ISA? How popular are ISAs? What are the tax benefits? How much can I invest in an ISA?

9 What can I invest in? You can invest in a wide range of different investments in an ISA including Cash, Fixed Interest securities such as Bonds and Gilts, Collective investments such as Funds (Unit Trusts and OEICs), Investment Trusts and ETFs, and Shares. There are certain types of investments that can t be held in an ISA. These include unlisted shares and those not traded on a qualifying stock exchange. If you have a specific investment in mind then it s worth checking with the ISA provider before opening an account, not only to check if the investment is eligible in an ISA, but also because not all ISA providers will offer all eligible investments. Cash Investing cash in an ISA is similar to a normal savings account, like a bank or building society deposit account, National Savings Plans (but not Savings Certificates or Premium Bonds) and cash unit trusts. The difference is that in an ISA all interest will be tax free, whereas interest in other savings accounts will be taxable once it exceeds your personal savings allowance. Your personal savings allowance will depend on what rate of tax you pay. For the tax year starting 6th April 2016; n Basic rate (20%) tax payers will be able to earn 1,000 interest without paying tax. n Higher rate (40%) tax payers will be able to earn 500 interest without paying tax. n There is no personal allowance for people who pay the additional rate (45%) of tax. If you choose to invest cash in an ISA then, like with a savings account, you ll need to decide how long you want to tie your money up, whether you want branch, postal or online access, and whether you want a fixed or variable rate of interest. It s then a case of finding a good deal that meets your needs. The TD ISA is intended for stocks and shares investments. Whilst you are able to hold cash in your ISA, prior to choosing or moving between investments, this should not be for the long term and interest is not currently paid. 9 ISA Quick Facts What is an ISA? How popular are ISAs? What are the tax benefits? How much can I invest in an ISA?

10 What can I invest in? Bonds and gilts Those looking for a regular income can invest in corporate bonds issued by companies listed on a recognised stock exchange or admitted to trading on an exchange in the European Economic Area. They can also buy UK government bonds and the equivalent securities from other countries in the European Economic Area. Corporate and government bonds pay a fixed level of interest according to a predetermined schedule and are normally redeemed at face value on maturity. The main advantage of holding these securities in an ISA is that there is no income tax liability on the distributions. Bonds are generally considered less risky than shares because of the fixed nature of the income payments and the redemption on maturity, although this isn t the case for quality short dated bonds and gilts with less than 5 years to maturity. The main risk is that the issuer could default on their obligations, in which case you could lose some or all of your initial investment as well as any future entitlements. Funds Funds are investment vehicles that allow a large number of people to pool their money together for investment in a basket of assets ranging from stocks and bonds to property and commodities. When you buy units or shares in a fund, you are buying an ownership stake in a range of investments that are managed by a fund manager who combines your money with that of other investors to buy and sell various investments. The goal is to grow the value of the fund and either enable investors to grow their money, preserve capital or generate income. The many thousands of funds available to investors are differentiated by their investment strategies and their investment holdings. While some funds are focused on buying bonds issued by large corporates, others might be specialists in backing specific companies. Investors should be aware that a fund s investment strategy will have an impact on its risk profile and performance too. 10 ISA Quick Facts What is an ISA? How popular are ISAs? What are the tax benefits? How much can I invest in an ISA?

11 What can I invest in? Funds continued... Two types of pooled funds, containing a portfolio of investments which are often grouped together, are Unit trusts and Open Ended Investment Companies (OEICs). These baskets generally invest in one or more of the main asset classes shares, bonds, property, cash and derivatives. Both kinds are classed as open-ended investments, meaning their size isn t limited and varies according to supply and demand. Open-ended funds have no maturity date and can grow larger or smaller depending on the number of investors wishing to buy or sell their shares or units, which can rise and fall in number. Shares Another popular option is to invest in shares issued by companies officially listed on a recognised stock exchange or admitted to trading on an exchange in the European Economic Area. Investing in this manner provides a method of diversifying your portfolio. For details on the different international investing options, please refer to our website Investing in shares is more risky than a managed fund because you are effectively buying a small stake in the company, but the potential rewards can also be higher. The value of your holding will fluctuate according to the presiding sentiment and expectations about the future performance of the business. Remember, if you receive dividends then there s no further tax to pay on this income and no need to declare this on your tax return. Investing in shares is more risky than a managed fund because you are effectively buying a small stake in the company, but the potential rewards can also be higher. 11 ISA Quick Facts What is an ISA? How popular are ISAs? What are the tax benefits? How much can I invest in an ISA?

12 How to Invest There are different ways to invest your annual ISA allowance. If you have the money to hand then you can pay in a lump sum at the start of the tax year and that way the money is invested for longer. In practice, many people leave it closer to the deadline of April 5th before making their annual subscription. However if you do this you could be missing out on a years growth of your investment; our illustration opposite shows why it pays to invest early... If you haven t got a lump sum to invest you could set up a monthly direct debit to make regular investments. A regular investment facility like this helps to spread your subscriptions and build up your portfolio overtime. Whichever way you do it the key point to remember is that any unused allowance is lost at the end of each tax year. It pays to invest early... Two Investors... Susan Jane Both invest their full ISA allowance over 10 years... Year Annual ISA Allowance Total 7,000 7,000 7,200 10,200 10,680 11,280 11,520 15,000* 15,240 15, ,360 7,000 7,000 7,200 10,200 10,680 11,280 11,520 15,000* 15,240 15, ,360 *We are aware that the ISA allowance for 2014/15 changed mid-way through the tax year. For simplification purposes we have used an allowance of 15,000 for both Susan and Jane. Each year, Susan uses her ISA allowance on the first day of the tax year 6th April Full ISA allowance Both portfolios grow 5% each year... Each year Susan gets a years growth that Jane misses out on Annual Growth 5% 5% Jane has money available, but doesn t get around to using her full ISA allowance until the last day of the tax year 5th April Over 10 years this has a compounding effect accelerating Susan s portfolio value Capital invested over 10 years Growth over 10 years 110,360 29, ,360 23,099 At the end of ten years, Susan and Jane have invested the same amount of capital, however Susan s portfolio has grown more by 6, demonstrating that in this example it pays to invest early Full ISA allowance Total 140, ,459 6,672 This example is for illustration purposes only. Please remember the value of investments and the income derived from them can fall as well as rise and you may not get back all the money you invested. 12 ISA Quick Facts What is an ISA? How popular are ISAs? What are the tax benefits? How much can I invest in an ISA?

13 Bed & ISA / Share exchange Schemes If you hold company shares outside of an ISA and have not yet used your full annual allowance you might want to consider a move known as Bed & ISA. This involves selling some or all of your holdings and buying back the shares in your ISA where any future capital gains would be tax-free. At the point that you sell your existing shares you will realise any capital gains you have made, although these may be covered by your Annual Exempt Allowance depending on the level of gain made. If the sale realises a loss you can carry it forward to offset it against any future taxable gains. There may be another option if you work for a company that operates a Save As You Earn (SAYE) scheme or Share Incentive Plan. These offer a tax efficient way for employees to buy shares in their employer. Maturing shares can be transferred to an ISA without the need to sell them and buy them back, although the value of the transfer will count towards your annual ISA allowance. If you decide to do this you must act within 90 days of the shares ceasing to be part of the SAYE scheme. There may be another option if you work for a company that operates a Save As You Earn (SAYE) scheme or Share Incentive Plan. 13 ISA Quick Facts What is an ISA? How popular are ISAs? What are the tax benefits? How much can I invest in an ISA?

14 Junior ISAs A Junior ISA allows parents, grandparents and family friends to invest in a tax efficient manner on behalf of a child. The investments within the account are free of income and capital gains tax with the recipient unable to access the money until they reach 18, at which point the child assumes full control and the Junior ISA converts into an adult ISA. This would enable them to withdraw the capital if they choose to do so. For a child to be eligible for a Junior ISA they must have been born after 3rd January 2011 and be resident in the UK. An older child born before 1st September 2002 would also qualify if they are still under 18 and do not have a Child Trust Fund. If your child was born between 1st September 2002 and 2nd January 2011 they will have been given a Child Trust Fund. If you didn t set up the account the Government will have done so on your behalf. You can find where it is currently held by going to the HMRC website. Child Trust Funds can be transferred to Junior ISA managers whereby upon receipt of the Child Trust Fund they will convert this into a Junior ISA. Similarly to an ISA, parents have the choice between a Cash Junior ISA or a Stocks & Shares Junior ISA. The ISA subscriptions can be allocated however they want, but unlike the adult equivalents they cannot open a different account each year, although they are allowed to switch providers. TD Direct Investing offers a Stocks and Shares Junior ISA, just remember you need to have an account with us before you can open a Junior ISA. 14 ISA Quick Facts What is an ISA? How popular are ISAs? What are the tax benefits? How much can I invest in an ISA?

15 In summary An ISA is a simple and flexible way to save and invest and keep more money for yourself by paying less tax - you do not have to pay capital gains tax on any profits or further tax on any income received. You can invest in a wide range of different assets from cash to stocks and shares and each year you get a new annual tax free allowance allowing you to grow a significant tax free investment sum overtime. 15 ISA Quick Facts What is an ISA? How popular are ISAs? What are the tax benefits? How much can I invest in an ISA?

16 Legal Disclosure Brokerage Services provided by TD Direct Investing (Europe) Limited (a subsidiary of The Toronto-Dominion Bank). Incorporated in England and Wales under registration number Registered office: Exchange Court, Duncombe Street, Leeds, LS1 4AX, United Kingdom. Authorised and regulated by the Financial Conduct Authority, 25 The North Colonnade, Canary Wharf, London, E14 5HS, United Kingdom (Financial Conduct Authority firm reference number ), member of the London Stock Exchange and the ICAP Securities and Derivatives Exchange. VAT Registration No Banking Services provided by TD Bank N.V. Incorporated in the Netherlands and registered as a branch in England and Wales under branch registration number BR Authorised by the Dutch Central Bank (De Nederlandsche Bank DNB Institution Number 481) and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority (Financial Conduct Authority Firm Reference Number ). Details about the extent of our regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from us on request ISA Quick Facts What is an ISA? How popular are ISAs? What are the tax benefits? How much can I invest in an ISA?