I transferred an ISA and demanded no gaps in interest - I won!

masonic

Consumerist wrote: »

I don't see any problem here at all.

Halifax is effectively making an extra payment of interest into the ISA on the day it receives the funds; it hasn't broken any ISA rules. The fact that another manager has paid interest before the ISA was transferred is irrelevant. There is no question of receiving interest from both managers at the same time because it simply does not happen; it is just promoted that way because the additional payment is proportional to the time taken to transfer the ISA.

It's no different to the Santander £100 switching incentive or, for that matter, the £5 per month on the Halifax Reward current account except that, in these cases, Santander pays HMRC an additional £25 for every £100 it pays into a current account and Halifax pays an additional £1.25 to HMRC each time it pays £5 into a Reward current account. Nobody seems to have any difficulties with these additional interest payments.

Halifax is not entitled to pay interest tax free until they receive the paperwork from the old ISA manager. If it is paying income tax on the customers behalf as it does with Reward payments, then that's fine, but I don't think that's the case.

Consumerist

masonic wrote: »

Halifax is not entitled to pay interest tax free until they receive the paperwork from the old ISA manager. If it is paying income tax on the customers behalf as it does with Reward payments, then that's fine, but I don't think that's the case.

Any bank is only obliged to pay at least the account's stated interest rate at any given time, subject to any notice period it must give to depositors; but this has nothing to do with HMRC.

After any notice period, Halifax can pay any amount of interest at any time it likes once the ISA has been transferred. It can pay 30% AER or 50% AER or any other AER it likes for a whole year, a month or a day if it wants to and HMRC has no complaint whatsoever. There is no cap on the amount or the rate of interest a bank can pay, whether it is an ISA or not.

Whatever interest a bank does pay into a cash ISA account, HMRC will not tax it. What could be simpler ?

masonic

Consumerist wrote: »

Any bank is only obliged to pay at least the account's stated interest rate at any given time, subject to any notice period it must give to depositors; but this has nothing to do with HMRC.

After any notice period, Halifax can pay any amount of interest at any time it likes once the ISA has been transferred. It can pay 30% AER or 50% AER or any other AER it likes for a whole year, a month or a day if it wants to and HMRC has no complaint whatsoever. There is no cap on the amount or the rate of interest a bank can pay, whether it is an ISA or not.

Whatever interest a bank does pay into a cash ISA account, HMRC will not tax it. What could be simpler ?

It is the duty of the ISA manager to apply tax relief only to ISAs containing valid subscriptions, which is where Halifax are slipping up by offering tax free interest on ISA subscriptions even before the transfer of those subscriptions has been agreed.

If interest is being paid on the ISA subscriptions by the new ISA manager prior to the agreed transfer date, then HMRC can quite reasonably decide that incorrect tax relief was applied to the account, rendering it invalid. In cases where such a breach has occurred, HMRC can and do require ISA managers to retrospectively deduct income tax from the interest of the invalid ISA.

At the end of the day, the 'ISA guidance notes' document that sets the regulations ISA managers must abide is almost 200 pages long, so in answer to your question 'what could be simpler?', I think most things are.

Consumerist

masonic wrote: »

It is the duty of the ISA manager to apply tax relief only to ISAs containing valid subscriptions, which is where Halifax are slipping up by offering tax free interest on ISA subscriptions even before the transfer of those subscriptions has been agreed.

Halifax does not pay anything at all into the ISA until it has been duly transferred.

Once the transfer is completed, an ISA manager may pay whatever interest it likes on the account (subject to giving sufficient notice to depositors, if required)..

It could, for instance, pay a switching bonus if it wanted too. In reality that is what Halifax is doing but it chooses not to pay a fixed amount (as, for instance, Santander does on current accounts) but chooses instead to pay a bonus which is designed to be proportional to the time taken to transfer the ISA funds.

Halifax is not breaking any ISA rules at all but is merely making interest payments, just the same as any other ISA interest payments. HMRC has no complaint.

masonic

Consumerist wrote: »

Halifax does not pay anything at all into the ISA until it has been duly transferred.

Once the transfer is completed, an ISA manager may pay whatever interest it likes on the account (subject to giving sufficient notice to depositors, if required)..

It could, for instance, pay a switching bonus if it wanted too. In reality that is what Halifax is doing but it chooses not to pay a fixed amount (as, for instance, Santander does on current accounts) but chooses instead to pay a bonus which is designed to be proportional to the time taken to transfer the ISA funds.

Halifax is not breaking any ISA rules at all but is merely making interest payments, just the same as any other ISA interest payments. HMRC has no complaint.

If it is interest, then it is taxable because it relates to a period of time when no tax relief could be applied to the account. If it is a bonus, then it is taxable, because there are no provisions for tax relief on bonuses paid inside an ISA. Either way. what Halifax is doing is not in keeping with the ISA rules and HMRC could one day turn around and demand any tax it believes is due because of that.

MarkyMarkD

I don't agree, Consumerist.

The ISA rules specifically prohibit the payment of artificially high amounts of tax-free interest on a feeder account, which could be disguised exactly like this - as an additional amount of interest on the ISA once it is opened, and on linkages between ISAs and non-ISAs where there is effectively cross-subsidy to the tax-free ISA. (In other words, a bank cannot pay 1% on a mandatory £10k on a non-ISA, and then pay 9% tax free on £10k in an ISA). I don't believe that all the ISA deals available entirely comply with these rules.

The Halifax deal is wrong in principle. It is not expressed in the way you creatively suggest. It is clearly expressed that interest is payable from day one of the transfer process. And that does mean that you are earning interest on the same ISA funds, from two providers, at the same time.

I'm not happy that it is fair or right under the letter of the ISA rules and it certainly isn't within the spirit of those rules.

I'm interested that you appear to have checked the situation out with HMRC.

Consumerist

masonic wrote: »

If it is interest, then it is taxable because it relates to a period of time when no tax relief could be applied to the account. If it is a bonus, then it is taxable, because there are no provisions for tax relief on bonuses paid inside an ISA. Either way. what Halifax is doing is not in keeping with the ISA rules and HMRC could one day turn around and demand any tax it believes is due because of that.

Any interest paid into an ISA is not taxable. That interest may be paid at the beginning, at the end or at any time in between.

What Halifax is doing does not break ISA rules in any way. It pays interest on the funds deposited while the funds are on deposit.

Consumerist

Let's try looking at this from a different perspective.

Say, for example, Halifax offered to pay an extra 0.2% interest on its ISA if you transfer funds in from another ISA manager. (It already offers 0.2% extra to its current account holders). Does this offer break any ISA rules ?

If you think that's OK then read on.

Now, that extra 0.2% interest represents roughly the equivalent of 26 days of interest at 2.8% AER. Halifax decides to describe that extra 0.2% interest as an extra 26 days of interest. Isn't this the same 0.2% offer which has just been described differently ?

All Halifax is currently offering is an additional amount of interest which represents the time taken to transfer the ISA.

Does this offer break any ISA rules ?

Edit
Speaking for myself, I am satisfied that the Halifax offers of 0.2% extra interest as a current account holder and the exra interest "from day one" do not break any ISA rules and I would be very happy to be transferring in to a good deal.

masonic

Consumerist wrote: »

Does this offer break any ISA rules ?

If Halifax did what you suggested, then yes, I believe that would be sufficiently disguised so as not to be perceived as being in conflict with the ISA rules.

It is probably the case that if Halifax really did limit interest on ISA transfers to being paid from day 1 (and not day -26), they would probably be able to offer a better rate just as you suggest, which in the long term would benefit the customer and themselves (because they would be more likely to retain the funds). Moreover, the system you've described above would not incentivise slow ISA transfers, which is something that does nobody any good.

Consumerist

masonic wrote: »

If Halifax did what you suggested, then yes, I believe that would be sufficiently disguised so as not to be perceived as being in conflict with the ISA rules.

As mentioned earlier, Halifax already pays an extra 0.2% interest on the ISA Direct Reward to their current-account customers but there have been no complaints of breaking ISA rules even though it represents an extra 26 days of interest.

I agree that the "day one" offer does not appear to provide any incentive for faster transfers except that if customers prefer this kind of hassle-free transfer and it leads to a greater take-up then other banks may be persuaded to make similar offers so that ISA transfer times become virtually irrelevant. That's in everyone's interest, in my view.