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

Consumerist

masonic wrote: »

the bottom two scenarios are just logical extrapolations of your notion that banks can pay whatever interest/bonus they like into an ISA without having to justify what they are doing to HMRC.

You misunderstand my notion.

My notion is that the Halifax offer would not give HMRC any cause for complaint. Your notion, as I understand it, is that a transferred ISA would be earning interest from two managers at the same time which HMRC would disallow.

Halifax is effectively offering a bonus to encourage customers to switch existing ISAs to them.

Under the terms & conditions of the offer, Halifax will only pay this bonus if the transferred funds are received within 60 days. If, then, your funds arrive after the 60-day limit, the bonus will not be paid. So it is clear that no real interest will have been earned during the transfer period otherwise you would still be entitled to interest "from day one" until your funds do eventually arrive. The interest "from day one" is, therefore, a notional interest rather than real interest.

If Halifax are not paying interest during the transfer period then only one manager is paying interest on the ISA at any given time. A year after the transfer, Halifax will pay a bonus which is proportional to the time taken (up to 60 days) to transfer the ISA.

masonic

Consumerist wrote: »

Halifax is effectively offering a bonus to encourage customers to switch existing ISAs to them.

Even if Halifax was paying a fixed sum of £100 to customers transferring ISAs to them, I believe they would have to pay that money outside of the ISA because otherwise it would be counted as a subscription and be deducted from the customers annual allowance. That isn't what Halifax is doing, but there is some similarity.

If Halifax are not paying interest during the transfer period then only one manager is paying interest on the ISA at any given time. A year after the transfer, Halifax will pay a bonus which is proportional to the time taken (up to 60 days) to transfer the ISA.

Halifax is telling customers that they are accruing interest on their ISA subscriptions at the same time as it is earning tax free interest elsewhere, yet you believe it can convince HMRC that it is not doing that, but instead paying a cash bonus into the ISA (something I do not think it can do, incidentally) that only appears to be backdated interest. I don't think HMRC is going to swallow that, but even if they did, I don't think the ISA rules permit the payment of arbitrary cash bonuses into ISAs. Either it is backdated interest, which we agree is not allowed, or it is a cash bonus (similar to being given £100 for opening the ISA), which is completely unprecedented and that I believe is also not allowed.
Edit: Just to add, I don't think there would be any issue with Halifax paying this bonus to compensate customers for transfer delays outside of the ISA wrapper, for example by cheque.

Consumerist

My understanding of the ISA is that it is simply a savings account on which no tax is charged on interest paid.

masonic wrote: »

Even if Halifax was paying a fixed sum of £100 to customers transferring ISAs to them, I believe they would have to pay that money outside of the ISA because otherwise it would be counted as a subscription and be deducted from the customers annual allowance. That isn't what Halifax is doing, but there is some similarity.

My simple concept of the ISA requires a subscription to be paid in by me, not the bank. Anything the bank puts in is, effectively, interest as far as HMRC is concerned. In the case of a current year ISA, the subscription limit may already have been reached, anyway.

In an ordinary account, the bank might want to pay a bonus, say, to celebrate a centenary or, say, as a loyalty bonus or some such, but as far as HMRC is concerned that is just more interest which it will tax as such. If such a bonus was paid into an ISA, why would HMRC want to regard it as anything other than interest just because it's paid into an ISA ?

Halifax is telling customers that they are accruing interest on their ISA subscriptions at the same time as it is earning tax free interest elsewhere, yet you believe it can convince HMRC that it is not doing that, but instead paying a cash bonus into the ISA (something I do not think it can do, incidentally) that only appears to be backdated interest. I don't think HMRC is going to swallow that, but even if they did, I don't think the ISA rules permit the payment of arbitrary cash bonuses into ISAs. Either it is backdated interest, which we agree is not allowed, or it is a cash bonus (similar to being given £100 for opening the ISA), which is completely unprecedented and that I believe is also not allowed.

I regard the Halifax offer as a similar ruse, if you like, to that used by power companies who tell us that we do not pay a standing charge in their tariff when we all know that they charge extra on the initial units used so that we do, in effect, pay a standing charge. Then there are "no commission" currency purchases where we all know the commission is, in effect, built into the exchange rate they use. I could go on.

When I first looked at the Halifax offer I got the impression that they had introduced a number of unnecessarily complicated conditions (60 day limit, £1 minimum balance throughout the reward period) and wondered why. Having had this discussion with you, it occurs to me that someone at Halifax may have gone over this offer with a fine-toothed comb and perhaps the reason for that was to enusure it has complied with all the requirements of the ISA rules.

Perhaps my concept of the ISA is rather simple but I cannot see that Halifax is doing anything that HMRC would have a problem with and the "from day one" offer is, in reality, just a promotional presentation of what is, in effect, a bonus.

MarkyMarkD

masonic wrote: »

Also, what's to stop a bank saying if customers hold an ISA and also a separate savings account with them, they'll pay the interest from both accounts into the ISA (but it's really a savings account with a rate of 0% and an ISA with an interest rate that depends on your savings account balance). We could all earn tax free interest on all of our savings. I'm sure HMRC won't mind.

As I've already pointed out, this is precisely and explicitly not allowed under the HMRC ISA Guidelines. HMRC are not stupid. They have not defined the rules in such a way as to encourage the payment of interest within the ISA wrapper which is earned on money outside the ISA wrapper. Exactly like the money which is outside the Halifax ISA wrapper because it's still earning tax-free interest with (say) Nationwide, during the "Halifax ISA promise" period.

Consumerist

For the sake of argument, let's say that HMRC has some objection to the payment of interest "from day one". What are the implications for the customer ?

Halifax pays the gross interest into customers' accounts and then has to account to HMRC for tax. If HMRC refuses to allow tax relief on the "from day one" element of the interest then only Halifax is out of pocket and, as far as the customer is concerned, interest has been paid "from day one", as promised. I don't see Halifax asking its customers to pay back the tax relief it has been unable to claim from HMRC.

What will it cost Halifax in those circumstance ?

Let's assume that all the ISAs opened during the offer period are transfers-in which all take the full 60 days to transfer. 60 days interest at 2.8% AER is less than 0.5% in addition but very likely a lot less (say, around 0.2%) because transfers normally take less than 30 days and some of those ISAs will be new subscriptions (not involving a transfer). Halifax may have considered this to be a reasonable price to pay for the increased custom. It is possible that Halifax originally intended to offer 3.00% AER on the ISA but chose the "from day one" marketing strategy in its place, reducing the ISA rate accordingly..

In any event, the customer has been paid what Halifax has promised. And that's all that customers will worry about.

Have I understood the situation correctly ?

masonic

Consumerist wrote: »

Have I understood the situation correctly ?

No, I don't think you have. When HMRC consider that there is a breach of the ISA rules, the ISA will be invalidated. There is a well defined procedure for 'repairing' invalid ISAs. This almost always involves removing invalid funds and any income or gains arising from the breach and repaying any tax owed as a result of the breach. So, not only would Halifax have a tax liability that they may or may not pass on to the customer, the invalid interest/bonus (whatever you want to call it) would also need to be removed from the ISA. There is also a lot of paperwork that Halifax would need to do to satisfy HMRC that the matter has been dealt with correctly. This process may also lead to a certain amount of distress on the part of the customer.

Halifax is taking a big risk in what it is doing. It may get away with it, but then again it may not.

Consumerist

Interesting. Thanks for that masonic.

Well, I suppose that we must hope that Halifax has gone through it with a fine-toothed comb before going down this route. They do say that if something looks too good to be true then it probably is. If there has been a breach of regs then let's hope Halifax picks up the tab.

It's been an interesting exploration for me. I know ISA subscription and transfer rules can be complicated but they are seemingly even more complicated than I thought.

It is disappointing that you have to be a lawyer these days before you can safely bank or save.

Thanks again for your input.

Footnote

I've just been looking at the ISA Guidelines for ISA Managers of Aptil 2008 which says :-

5.2 Before a manager can open an ISA, he must hold
• a valid application, which he has accepted (paragraphs 5.8 and 5.9), and
• a valid subscription (paragraphs 6.1, 6.6 – 6.11 and 6.19 – 6.34).
ISA managers should apply this test each year if they need to determine whether
an ISA or subscription to an ISA is valid (paragraphs 12.26 – 12.27).
5.3 An ISA begins from the later of
• the date on which the ISA manager accepts the application form, and
• the date on which the subscription is made (paragraph 6.9).
The manager should record the date he accepted the application (which may not be
before the date of application) in his records. This means that applications may be
accepted before the tax year in which subscriptions can be made.

According to this, the ISA is not "open" until the funds have been received so that the interest "from day one" will be outside the ISA, as you suggested earlier. The question, then, is how Halifax proposes to pay that interest separately if the customer doesn't also have another account with them. Perhaps the cheque you also suggested earlier.
It's taken a while but I think I see your point now. :beer: