'Offset' ISAs? are they alllowed?

Gordon_the_Moron

MarkyMarkD wrote:

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.

They don't represent a form of tax evasion, they represent a form of tax avoidance.

Tax evasion is illegal
Tax avoidance is legal

Whether you approve or not offsetting loans/mortgages and savings is not illegal.

Da Moron

MarkyMarkD

I don't believe that they are necessarily legal, but I wasn't meaning to state that they are illegal and therefore I did mean avoidance - thanks for pointing that out.

I don't see why HMRC accept them, as they are marketed purely as a tax avoidance device for most people and they could choose to do something about them if they were so inclined.

EdInvestor

If offsetting was stopped many people would just use the money to pay down the mortgage. No tax advantage to the Revenue there.

And if having down that, they lost their job, they would have no cash backup and be straight onto state benefits.So a potential downside.

It's better overall to give people flexibility - who knows, they might spend some of their offset money, thus helping with the consumption aspect of economic growth as well. That feeds through into more jobs, bigger company profits and higher tax revenues anyway.

Bernie

MarkyMarkD wrote:

Ah right. So they are offsetting the tax-free accounts last, which makes sense for you.

...now each year, we transfer from the offset deposit to the offset ISA putting more funds out of taxation ready for the future when we pay down the mortgage - and now, as a surprise bonus, we're actually accumulating more tax-free interest in the TOISA.

:beer:

isasmurf

Bernie, Out of interest why do you have a TOISA and a ISA with the same provider? Wouldn't it be simpiler to have them as one account?

Bernie

...we transferred the TOISA and ISA - in the wife's name - into IF sometime back before we knew TOISA's could be amalgamated into an ISA. When I got round to transferring my pair, the rules had changed and I did combine them. Since both accounts are offsetting the mortgage, it does really matter.

It's going to work out handy though, next financial year, the wife will transfer the TOISA out to a new ISA (we've covered the offsetting of this).

Then, if we we can afford to transfer more money from the offsetting, we'll transfer money from IF to the new ISA account to earn tax-free interest.

If we can't afford to move more cash away from the offset, then we can transfer cash internally from the offset deposit account into the wife's offset ISA, simply placing more cash into the tax-free wrapper without affecting the offset.

Hope that makes sense...

:beer:

MarkyMarkD

EdInvestor wrote:

If offsetting was stopped many people would just use the money to pay down the mortgage. No tax advantage to the Revenue there.

And if having down that, they lost their job, they would have no cash backup and be straight onto state benefits.So a potential downside.

It's better overall to give people flexibility - who knows, they might spend some of their offset money, thus helping with the consumption aspect of economic growth as well. That feeds through into more jobs, bigger company profits and higher tax revenues anyway.

My point is not that stopping offsetting would stop people paying down the mortgage. It's that if offsetting was stopped, people would buy better value mortgages (as most offset mortgages are poor value) and HMRC would stop subsidising offset mortgage lenders, which is most of what's happening at the moment.

In other words, most of the tax benefits of offsetting are being taken by the lenders, not by the borrowers.

roswell

im not sure how a 0% mortgage can get better value

masonic

roswell wrote:

im not sure how a 0% mortgage can get better value

How about by dropping the underlying rate. You aren't really suggesting that people who have offset morgages can offset them 100% with savings from the start?

Bernie

...That's exactly what we have done!

It might sound odd but we chose to do this because buying outright would have cleaned us out cash-wise including all the cash we'd managed to put into tax-free shelters.

To re-iterate my earlier postings on the site:

• The mortgage cost us £400, it is now effectively a very large interest-free loan that we will pay back over the next 10 years.
  
• Our ISAs and TOISA are still intact until we "buy-them-back" by either replacing them with cash deposits (some policies maturing) or later when we have paid back enough of the capital.
  
• Each year, we can move cash from our offset deposit account into the tax-free shelter our ISAs ready for when they can be removed from the offset and start earning interest again. There will be an additional £30K in each ISA by then if nothing changes and we go to the full term.
• We still have immediate access to the deposited funds if we need them (even though we've really already "spent" the money on the house we're living in)
  

...so I think there are distinct advantages in this course of action.