The UK and the US offer very similar kinds of financial services products but being labeled differently can make it difficult to ascertain how they correspond to each other.
In the UK, one of the most popular tax-efficient savings products is ISA. This is available via a number of different channels including banks and comparison sites such as moneysupermarket.com and can include cash, stocks, and shares or a combination of both.
A Brief History of the ISA in UK
The Individual Savings Account has been available for consumers since 1999 and they were first put forward in a budget made by Gordon Brown after he became Chancellor of the Exchequer. This is how modern ISAs came about, but the principle behind them has existed for longer than that.
Principle of tax-free savings and investments
We can trace the principle of tax-free savings and investments back to the late 1980s, when initiatives were put into place first to help people invest in the stock market, and then to save more money without having to pay any tax on the interest.
These initiatives were called Personal Equity Plans and Tax-Exempt Special Savings Accounts respectively. One of the criticisms of ISAs, when they were first introduced, was that they did not allow people to save as much as they had before. They were also thought to be too complicated.
However, proponents of the new type of financial product said that investment ISAs would allow people to save over the long-term. In some ways, circumstances helped to make the investment ISA very popular: this was around the time of the tech-boom and everyone wanted to get in on the growth. Originally, the cash component of ISAs was meant to be phased out over time.
As you probably know, this didn’t happen. Events such as the collapse of the tech-boom and the terrorist attacks in the United States had a detrimental impact on the stock market, which affected many people’s shares ISA and encouraged more people to save in the cash ISA instead. This is partly why today the vast majority of money in ISAs is found in cash ISAs.
Many people still invest in investment ISAs, though, and the best ISAs have done very well despite troubled economic circumstances.
Also, as ISAs have become more entrenched in our national psyche and the annual limit has continued to rise (it is now able to rise with inflation, a change that came into effect for the 2011/2012 tax year), different types of investment ISA have been developed.
For example, as well as ISAs that track all the shares on the London Stock Exchange, there are also climate change ISAs that invest in companies with a lower than average carbon footprint.
Recent developments have also extended the ISA range: when the Child Trust Fund was abolished, Junior ISAs were set up in their place to encourage parents to save for their children, although the state will not contribute to these as they did to Trust Funds.
Overall, even though tax efficient savings have changed over the years, they are very important for savings and investments and their initial purpose – to encourage people to save and invest – remains the same as it always was.
More Detail About ISA Savings Account
The most important foundation for any financial plan for any person in the world is a savings account; furthermore, having just answered the top-level question an ISA savings account is just that, an individual savings account.
Often times many neglect these accounts not maintaining a high enough balance to earn on that ultra high yield while leaving most of their money tied up with a credit of checking accounts which ultimately earn a massive amount less than a high yield savings account.
This type of account is most desirable by anyone that wishes to someday have something more than they do. Whether this is to ultimately retire or buy a new car is completely up to you, but without effective use of your savings account you will be taking the road less traveled by those that are deemed successful in personal fiscal matters.
Once you have decided to join these elites you can start your search for your own high yield account as soon as possible.
Some warnings and items of interest though for you the ever savings newbie. The higher the interest rate normally speaking the higher the minimum balance will be and the greater the fees for transactions over a predetermined limit.
For most, a mid-range interest rate will offer the most value after all if your constantly shifting funds around the penalties will easily outweigh the interest earned. So now you have found an account for which you will earn a decent rate and in case of an emergency or the next best thing besides sliced bread you will not lose your hat for shifting funds around.
Always take care to take time to talk to the institution which you have chosen to open this type of account with as their service in person or over the phone may one day be dire on your own account.
Once you have seen that they really want you as a customer and are willing to help you should you need it the next logical step is to ask around co-workers and family to see if they have any knowledge.
There is no tax relief on the money invested but when the funds are withdrawn they are exempt from both capital gains tax and income tax, which can offer a substantial incentive to use the scheme.
However, so that the tax people are not robbed of all of their money, there is a yearly limit on how much can be invested into all ISAs held and this allowance increases on an annual basis in line with inflation.
In the US, the closest available product is a Roth IRA, named after the senator that sponsored the original legislation, William Roth. The scheme is designed as a type of retirement plan but in a similar way to the ISA, it provides its taxation gains when the money is to be drawn down, not when it is paid in.
One of the Roth IRA’s principal advantages is its flexibility and depending on the provider, the money can be invested into one of many different types of assets including derivatives or even real estate.
Just like an ISA in the UK, a Roth IRA has a cap on how much money can be invested every year to ensure funds are not being deposited simply as a tax scam.
Whilst the two products are very similar in a number of ways, there are some key differences that set them apart.
An ISA is a vessel for savings and investments and whilst it can certainly be used to accumulate funds for retirement, it is not solely for that purpose. This means that investors are free to take their cash before they retire with no restriction on how they spend it.
A Roth IRA, despite its flexibility, is still a retirement plan and whilst it allows a small number of withdrawals, individuals cannot access all of their cash penalty-free until they retire.
Unlike an ISA, a Roth IRA is not available to everyone. According to US laws, once an individual reaches a certain level of earnings, they are no longer permitted to contribute.
However, the one advantage that a Roth IRA does hold over an ISA is in the event of the holder’s death.
Should an individual die whilst holding money in an ISA, the tax-protective wrapper is stripped and the money becomes liable to Inheritance Tax. In the US, no tax is payable upon death on funds held in a Roth IRA because it is deemed to have already been taxed.
Despite the similarities between the two products and the Roth IRA’s clear advantage for estate planning purposes, the increased flexibility on an ISA plus the larger allowable contributions means that on this occasion, Brits get the slightly better deal over their Atlantic cousins.
Inheritance Tax Planning: Checkmate with the Taxman
Have you ever stopped to consider the numerous assets you have accumulated over your lifetime? Your home, savings, pensions, investments, businesses, and belongings all begin to mount up to a large financial value. Yet many are under the false idea that these assets – those which you have worked so hard for – will be rightly passed on to your family once you are no longer around.
In fact, your possessions will be legally pocketed by the tax man unless you have a rigid inheritance tax plan in place. Currently, in the UK, the 2011/2012 inheritance tax (IHT) threshold is £325,000, meaning if your estate is worth more than this amount the state is legally entitled to 40%.
But there are plenty of legitimate ways of playing the taxman at his own game. Make sure your assets are passed on exactly how you wish, with as little as possible going in the taxman’s pocket by devising an inheritance tax plan.
Your Inheritance Tax Planning Checklist
Make a will – One out of 10 people over the age of 65 dies without making a will, called dying ‘intestate’. If you pass without making a will your estate will be legally divided up amongst your next of kin according to a priority known as the ‘rules of intestacy’.
Unfortunately, it does not recognise partners who are are not married meaning they will receive nothing of your estate. Making a will guard against this giving you and your loved ones peace of mind.
Weigh up your pension options
Those of a certain age will have already considered their best pension options. Does your pension give you an option for a survivor pension scheme if you were to pass away? If you’re about to retire also research your annuities that available to you; some joint annuities will provide your partner with a lump sum or a regular income if you are to pass away during your contracted term.
Consider setting up a trust
Passing on an estate can often involve unintentionally passing on financial and stressful burdens, particularly to younger members of the family who may not be able to manage their own affairs.
A trust is a legally binding way of ensuring that selected ‘trustees’ can manage the asset on someone else’s behalf; a parent perhaps, until the beneficiary is of a suitable age. Some trusts can negotiate hefty inheritance taxes but they are expensive and complicated to set up – often best done with the help of a solicitor or an independent financial advisor.
If you believe your estate to be worth more than the £325,000 threshold then there are inheritance tax exemptions in place in the form of giving gifts providing they are given more than seven years before you die, known as ‘Potentially Exempt Transfers’ (PETs).
HMRC states that £3,000 can be given away annually either to a spouse, charity or national institution. Exempt gifts can also be given for special occasions such as a wedding whereby parents can each give cash or gifts worth £5,000, grandparents up to £2,500 and anyone else up to £1,000.
Working out an inheritance tax plan can seem like a headache and IHT laws can be a tricky business, particularly if you have a large estate or gifted numerous amounts to your relatives in recent years.
For more complicated tax planning and the financial options best suited to your unique circumstances, it may be useful to seek independent financial advice from a specialist in inheritance tax planning.
What To Do If You Can’t Pay Your Council Tax?
If you find yourself in the unfortunate position of not being able to pay your council tax, the worst thing you can do is ignore the problem and hope it will go away. The best thing to do is tell your local council that you are having difficulties and find out what the options are.
There are a number of things that the council can do, they may even be able to reduce your Council Tax bill. It is possible that you may qualifiedly for a Council Tax Discount, the best thing to do is get in contact and find out.
The council may reduce your council tax and offer you a one-off payment for the bill. This is not commonplace, the council will only offer this in extreme cases of hardship, for example, if you can’t pay your rent or bills. It is possible that your council may allow you to spread your council tax payments over a longer period of time, making it more manageable for you.
What happens if you don’t pay your Council Tax?
When you miss a payment, the first thing that will happen is you will receive a reminder. This will give you 7 days to bring your council tax payments up to date, if you fail to do this within the time period you will receive a second reminder.
If, after the second reminder you fall behind with your payments the council may ask you to pay your outstanding balance in full for the rest of the year. If you are not able to pay the balance, it is most likely that the council will start legal proceedings to recover the outstanding amount.
If you have failed to come to an arrangement with the council and things have got serious, your council can ask the Magistrates Court for a ‘Liability Order’. What this means, is that the Court will demand that you pay the amount you owe in full including costs. It is your right to attend the court hearing and offer evidence which shows why you are not liable for the amount in question.
If you fail to attend court, it may be a good idea to speak to the council or your local Citizens Advice Bureau. The reason for this is that the council may try and come to an arrangement with you for payment, however, they are not able to do this unless you make contact with them.
What happens if you ignore a Liability Order?
There are a number of things that can happen should you decide to ignore a Liability Order. It is possible that your council may take enforcement action against you in order to recover the debt. If you are working, it is most likely that deductions from your wages will be made.
If you are on benefits, they may be cut or reduced in order to recover the outstanding amount. In extreme cases, bailiffs can be used to recover possessions to the value of the outstanding amount.
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