ISAs, tax and the budget

In the budget a couple of days ago, the Chancellor announced that the ISA limits are to be increased from 2008. They're also doing away with the distinction between a maxi and mini ISA. Under the new rules you'll be able to invest up to £3,600 in a cash ISA, and £7,200 in an equity (ie shares) ISA. Whilst the benefits in terms of a cash ISA are certainly worthwhile they're hardly significant particularly given the current interest rates. Whether ISA's are useful for shares will depend a lot on the circumstances of the share investments. Say for example you and your spouse invest £35K in a managed equity fund for 10 years. If you get annual returns of 7% per year you'll be showing a profit of £33,850 after ten years. Taper relief will reduce the gain to around £20K with this then covered by your annual CGT exemptions. So even though you've earned nearly £35K in profits the tax charge would be nil. Even if you'd used an ISA there would have been no benefit. So you need to weigh up which investments will benefit from the ISA investment. Where ISAs really come into their own is where you hold on to them for many years and use them to generate tax-free income when you retire. In addition ISAs allow you to sometimes switch between different investment funds without paying any tax. This can be beneficial to allow a portfolio to be 'rebalanced'.