ISA as an income help please

happyhero

Hi I took out a self select MAXI ISA a few years ago and have been buying and selling stocks in it regularly. It has now grown to the point where I am considering taking a regular income from it, but although it is normally clear as to what the tax implications are with ISA's i.e. you don't need to tell the tax man anything, does this change at any point?

For example, yes they are free from tax, and you can put £7000 into a Maxi every year and hope it grows, but taking it to extremes, what if it grows ten fold, in theory the tax man should still leave you alone but it just seems odd to me that with that much in there, they wouldn't want something from you. Does anyone know if there are any regulations that change it's tax status at a certain extreme level, i.e a built in protection in the small print put in by the tax man?

Another query, if I were to take an income from the ISA and had no other real income, wouldn't the tax man become interested in the fact that I have an income yet I pay no tax on it.

Looking at it in another way, because I would not have to tell the tax man anthing about my ISA, it could appear to him that I pay all my debts, and mortgage etc, without any income, a bit odd on the surface.

Now I know the tax man does not often go looking and pairing up this information, but that does not mean I wouldn't contact the Inland Revenue about something else and therefore they would get to know all about my odd situation, not that I am doing anything odd, but just that I would like to know the possible implications.

I would be grateful for any comments or help regarding the above.

cheerfulcat

Hi there,

Income from an ISA is not taxable (yet), regardless of how much it's producing.

BTW, you might be interested in the Motley Fool's High Yield Portfolio discussion board if you're thinking of moving to income-generating investments.

dunstonh

There are also two ways to take income from an ISA. Fixed regular withdrawal and natural income. Fixed regular withdrawal is treated as withdrawal of capital but can be useful for those wanting a fixed amount every month rather than a fluctuating natural income. Also, it allows growth funds to continue to be used. Neither has any personal tax implications.

EdInvestor

happyhero

Congrats on your investment skills in acquiring enough capital and income to live on tax free.

Way to go.

dunstonh

One other thing, you may need to switch ISA provider (either by re-registration or transfer). Not all providers will allow income withdrawals or they will have restrictions on the way it is done or the frequency. One big fund supermarket comes to mind there (cofunds). The good thing is that the other 3 big fund supermarkets do allow it.

EdInvestor

Alternatively since happyhero has shares, Squaregain would be worth a look as it only charges 25 quid a year for its ISA regardless of the size.Income transfers to your bank are free and efficient.

happyhero

Cheers guys, all very helpful. I actually have the ISA with Barclays Sharedealing service and I believe there are no restrictions on regular withdrawals but I will have to double check.

cheerfulcat you say
Income from an ISA is not taxable (yet), regardless of how much it's producing.

Do you think this will change, any rumors?

I would have thought that the Tax man would hate it if some people got out of paying tax and earned huge amounts tax free, that is why I thought their may have been a clause at very levels or something. Someone out there may have hundreds of thousands out of an ISA. It would be like laughing in the tax mans face.

I may be getting off the subject here but I also have some shares with Barclays which are not in any ISA etc, if I took an income from them what would happen. I know about CGT at about £8000 but what if I don't have an income as far as the tax man is concerned because of the ISA. Could I take the profits from the ordinary shares as an income, and if I could, at what point would CGT come into play?

Also you get a personal allowance so what would happen with that, anybody any ideas please?

dunstonh

Do you think this will change, any rumors?

It can change from 2010 which is when they are up for review (review likely to take place the year before so we will know in advance). Unlikely to be changed significantly. A Government that does not have Gordon Brown in it may change the product. However, historically that tends to effect new contributions and not existing one. For example, PEPs still exist and LAPR on life assurance for those that took one out before the benefit was removed.

I would have thought that the Tax man would hate it if some people got out of paying tax and earned huge amounts tax free, that is why I thought their may have been a clause at very levels or something. Someone out there may have hundreds of thousands out of an ISA. It would be like laughing in the tax mans face.

There are also benefits to the Govt if you have savings. Less chance of paying out benefits in the future. Helps the companies that you invest in. ISAs are also liable for IHT so the Govt will get it's hands on the money at some point.

I may be getting off the subject here but I also have some shares with Barclays which are not in any ISA etc, if I took an income from them what would happen. I know about CGT at about £8000 but what if I don't have an income as far as the tax man is concerned because of the ISA. Could I take the profits from the ordinary shares as an income, and if I could, at what point would CGT come into play?

CGT is on the growth of the share. Not the income. So you would not have any worry on CGT as far as income is concerned.

cheerfulcat

happyhero wrote:

cheerfulcat you say
Income from an ISA is not taxable (yet), regardless of how much it's producing.

Do you think this will change, any rumors?

I would have thought that the Tax man would hate it if some people got out of paying tax and earned huge amounts tax free, that is why I thought their may have been a clause at very levels or something. Someone out there may have hundreds of thousands out of an ISA. It would be like laughing in the tax mans face.

I think that it's quite possible that the tax treatment of ISAs will change at some time in the future. I wouldn't base my investment decisions on this, of course; it's just something to keep in mind, especially when planning for income.

I don't suppose that there is that much *income* tax lost in the ISA wrappers, as far as the taxman is concerned - even a seemingly large capital sum, say £300,000, provides a fairly meagre ( safe ) income of ~15,000. Annual loss to the Exchequer less than £2000.

I may be getting off the subject here but I also have some shares with Barclays which are not in any ISA etc, if I took an income from them what would happen. I know about CGT at about £8000 but what if I don't have an income as far as the tax man is concerned because of the ISA. Could I take the profits from the ordinary shares as an income, and if I could, at what point would CGT come into play?

Also you get a personal allowance so what would happen with that, anybody any ideas please?

If you take the *dividend* as income and are a BR tax payer there is no further tax to pay. Selling the shares triggers a possible CGT liability but you have an allowance of £8500 to use. You can't use your income tax allowance against the proceeds. If all of your income were to come from within ISAs your personal income tax allowance would be wasted.

You need to be quite careful, if you are thinking of living off your investments, not to kill the goose that lays the golden eggs. In the case of dividend bearing shares, selling the shares deprives you of a ( sometimes considerable ) future income stream.

happyhero

Cheers dunstonh,

CGT is on the growth of the share. Not the income. So you would not have any worry on CGT as far as income is concerned.

I understand what you are saying here but what I meant was that I would have to sell enough shares to generate the income, and selling shares would mean I may sell enough i.e take profits that would amount to the £8500 limit. After all you cannot easily live on £8500 so I would want even more than that to take as a income if possible, which may mean realising a large profit.

But where I am confused, is if I then said, I want to say for example my job is now a Trader and I want to take these profits as income as I have no other income. Would they allow this, could I then use the normal tax rules used for income, i.e personal allowance, then so much at about 10%, then 22%, then 40%. If not why not? If the tax man said no to this as income, it seems crazy I would have no obvious income yet still be possibly paying CGT.

Cheers cheerfulcat

Selling the shares triggers a possible CGT liability but you have an allowance of £8500 to use. You can't use your income tax allowance against the proceeds. If all of your income were to come from within ISAs your personal income tax allowance would be wasted.

I cannot see a way of avoiding wasting my personal allowance if what you say is right. If I am able to live off the ISA and other shares then I am not going to have any other income except for small savings here and there, so what can I do? Any ideas?

You need to be quite careful, if you are thinking of living off your investments, not to kill the goose that lays the golden eggs. In the case of dividend bearing shares, selling the shares deprives you of a ( sometimes considerable ) future income stream.

As for this, I have done well with the shares so I am not going to be silly enough to sell them all, to, as you say, deprive myself of future income stream. My intention would be to let the total stock value stay the same or go up if I am lucky and only take off the cream each time to live on.

EdInvestor

If the tax man said no to this as income, it seems crazy I would have no obvious income yet still be possibly paying CGT.

Quite normal I'd have thought among the better off.

Your situation is rather more common that you think, I suspect albeit you seem to have got yourself into the ideal situation by accident.

When you get old and grey your personal allowance will get used up by the state pension.