Despite being referred to as ‘tax free allowances' there are significant hidden tax disadvantages within Unit Linked ISAs.
Not withstanding the Chancellor’s raid on dividend tax credits, ISAs also have other fundamental flaws which can be to the disadvantage of the high net worth individual or the active investor.
ISAs, like all investments, are not suited to everybody, and the individual with an Inheritance Tax problem has to realise that ISAs will bare tax at the full rate, if they form the top part of the estate. They cannot be placed into trust as they are personal tax allowances. Additionally, as many investors at the turn of the century found to their peril, losses in Unit Linked ISAs cannot be offset against gains elsewhere. Whilst this is not a problem when markets are rising, it is a distinct problem when markets fall.
But, there is a further disadvantage to ISAs, the full importance of which is only just being comprehended. After the last four years of the bull market, what we have seen, for the first time in a long time, is a phase when all asset classes have correlated together.
We have seen a high yielding bond market, a rising property market and a rise in equity markets all at the same time. This year, this has inevitably resulted in a fall out in the bond market, then the property fund market and finally the equity fund market.
In the past a falling market in one asset class has never been a problem because ISA investors have been able to switch to an alternative type of investment. But at this juncture, there is no alternative investment that is performing well other than cash. Maxi ISAs have severe cash holding restrictions, leading to investors effectively being trapped in products where most funds have incurred losses.
The inability to hold cash to a large degree should be borne in mind when the Government's changes to the ISA rules come into effect next year!
Adrian Shandley is managing director of Premier Wealth Management
The views expressed in this blog are the individual's own and not necessarily those of the company he represents.
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