'Offset' ISAs? are they alllowed?

Milarky · 15 December 2006 at 12:28PM

Simple Idea. Each year you put in the mini cash ISA sub of upto £3000. What's to stop an ISA provider paying the interest you would have recieved on other savings held with them into the ISA account - where it would be free on income savings tax?

Eg Bank pays 5.2% (not the best) on all savings. When opening an ISA with them they require you to open a 0% 'deposit' account. So, if the amounts in both are the same (eg £3000) they will pay 10.4% on the ISA! Deposit account must be mantained at opening balance, and can only be closed by closure of ISA - but ISA withdrawals are allowed (eg take out £1500 and still earn 10.4% - but only on the £1500 left)

Another scenario. Each time you pay money into your ISA, it doesn't all go in there - the bank splits off a proportion and puts this on deposit at 0%. Withdrawals from the deposit account are permitted but then ISA must be closed?

I know these things look farfetched but my question is, 'is it legal?' Can such a device work within ISA account regulations and no bank has yet thought of this - or does the Treasury take a view? (I doubt they do - otherwise all offesetting would be in doubt taxwise)

As you can see, the bank pays the same interest as they would otherwise (possibly a bit less) - except they only pay via your ISA with them on the combined holding - in effect it gets around the ISA limits

Paul_Herring · 15 December 2006 at 1:45PM

Looks like a loophole that would get closed sharpish since it'll cost the treasury money.

isasmurf · 15 December 2006 at 8:16PM

Linked savings accounts are not allowed under ISA rules.

Banks are not allowed to use ISAs as marketing tools for other accounts, i.e insisting you open a 'normal' savings account if you open an ISA.

arrowsmith · 17 December 2006 at 4:24PM

isasmurf wrote:

Linked savings accounts are not allowed under ISA rules.

Banks are not allowed to use ISAs as marketing tools for other accounts, i.e insisting you open a 'normal' savings account if you open an ISA.

Smile however offer a different ISA rates if you have a current account with them, so in that respect are they flaunting the ISA rules ?

jonnyb · 18 December 2006 at 2:09AM

Milarky, I consider myself fairly well educated and financially astute.

Maybe its the fatigue at 1.00 am and lack of sleep, but your post here might as well have been written in swahili - I don't understand any of it.

Not a complaint, just an insomniac observation.

Milarky · 23 December 2006 at 12:38AM

jonnyb wrote:

Milarky, I consider myself fairly well educated and financially astute.

Maybe its the fatigue at 1.00 am and lack of sleep, but your post here might as well have been written in swahili - I don't understand any of it.

Not a complaint, just an insomniac observation.

No offence taken. The basic idea is to divert interest that would be payable on taxable savings accounts into an ISA. By definition an ISA is non taxable and so that represents a gain to the saver at no cost to the bank. The idea could work (technically) simply by declaring a nil rate of interest on the non-ISA account and a much higher rate of interest on the ISA. If equal balances were maintained in each account the interest on the ISA could be twice the average set by the bank.

Isasmurf has pointed out that ISA rules forbid accounts being linked to ISAs and that ISAs must be standalone products. So my suggestion is duly knocked on the head.

I proposed the term 'offset' because that is what it would allow - to offset the interest from one account to another - and thereby saving the tax normally due on the taxable savings account.

There are other 'abuses' that have occurred to me also in the past concerning ISAs: there is nothing to stop someone paying a very high rate of interest for a period of time (eg 100% pa) after one year this interest becomes ISA capital - and is tax free thereafter. So if you are prepared to 'give' me an amount of capital equal to my own, I can turn that into a tax free income stream thereafter - I just move my money to another ISA provider. I could set up a reverse arrangement to reward you with similar largesse and you too could take your enhanced capital away and it would be generate only tax free income. In effect we have put our own capital (via a swap) and called it 'interest' and the tax man is none the wiser. [But it would be illegal, I am sure, or otherwise fail to meet the rules on ISAs]

MarkyMarkD · 23 December 2006 at 12:56AM

I very much understand your OP, Milarky.

It's interesting that people think that this would be stamped upon. What interests me, in the same vein, is that offset mortgage accounts (including current account mortgages) are not similarly stamped upon as they represent a form of tax evasion (on savings interest) which is explicitly referred to as a product benefit by the lenders offering this form of mortgage.

If you have a savings account and a loan account with the same bank, normally you earn (taxable) interest on one and pay (non-tax-relievable) interest on the other.

It makes no sense to me that just because a lender chooses to call the two an offsetting arrangement, they are able to offset the balances before calculating the interest on the debt and hence (in reality) pay you tax free interest at your mortgage rate on the savings balance.

Presumably HMRC are too dense to understand that the wool is being pulled over their eyes and that most of the benefits are in fact being creamed off by offset lenders who generally charge uncompetitive rates.

roswell · 23 December 2006 at 7:09PM

You can offset a mortgage with a isa but you only get interest relief on the mortgage you dont get 2 lots of interest.

Bernie · 30 December 2006 at 7:08PM

...with Intelligent Finance Bank.

We could have bought our house outright but this would have required us to cash in our hefty ISA's and TOISA deposits and would have cleaned us out cash-wise. We weren't too comfortable with that scenario so we sought a better solution. We think we found it with off-setting. We have effectively "spent" all our money on the house yet still retain full access and control of "our" money should we require it.

Instead of paying for the house with cash outright, we decided forked out for an Offset Mortgage with IF. Our ISAs/TOISA now remain intact (but earn no interest). Each year, we can transfer £3000 each from our offset deposit account into our offset ISA. Nothing changes but the figures since we are fully offset. Each year, another £6000 of our hard-earned, post-tax savings gets put out of reach from Gordon's grasping mitt. With a very self-satisfied tax-saver's smile, we are both looking forward to the day we redeem the mortgage leaving us with a very significant part of our savings moved behind the tax-free wrapper of our ISAs. Brilliant!

We pay down the capital each month and when we have sufficient additional funds deposited to maintain the full offset, we intend to transfer out the ISA's out to a different (and better) providers.

When we feel comfortable, we will redeem the mortgage "when the time is right".

:beer:

MarkyMarkD · 30 December 2006 at 8:22PM

Bernie

Thanks for that, which is a great illustration of how an offset can work (for a few people). You have set it up in the optimal way such that you don't suffer the penal interest rates usually applicable to offsets, and you cleverly preserve the tax-free status of your funds - not a point I had previously considered too heavily.

Well done!

Bernie · 30 December 2006 at 9:30PM

MarkyMarkD wrote:

Bernie

Thanks for that, which is a great illustration of how an offset can work (for a few people). You have set it up in the optimal way such that you don't suffer the penal interest rates usually applicable to offsets, and you cleverly preserve the tax-free status of your funds - not a point I had previously considered too heavily.

Well done!

My pleasure, grateful to put some something back into this excellent website. I hope others can squeeze the benefits too. Me! - I just happen to be a natural born tight-wad who like to get the most possible bangs for minimum of his bucks - especially when it's Gordo's reaching out for my wallet again!

We were well pleased when it was announced that ISA's were being extended... it is not often that Gordon and his taxmen fall so neatly into line with one's plans. Preservation was the original idea and motivation - that will now be extended long into the future as possible.

:beer:

'Offset' ISAs? are they alllowed?

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