ISA error by broker - compensation advice needed

edited 30 November -1 at 1:00AM in ISAs & Tax-free Savings
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gt94sss2gt94sss2 Forumite
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edited 30 November -1 at 1:00AM in ISAs & Tax-free Savings
All,

I would be grateful for some help with this one.

My broker has accepted that due to an error on their part, I have lost my 2010/11 ISA allowance. I had tried to put the full £10,200 into a self select ISA in early April.

As a consequence, they have initially offered to compensate me £1972 and I am just trying to determine if its been worked out on a 'fair basis'. An explanation of how they have calculated it (and which I don't really understand) is below.

The Financial Ombudsman publishes its general approach to these cases here

I would like to go back to my broker asking:

a) why they didn't use the 7.5% figure quoted in the guidance; and
b) if they can consider more than 10 years - as I consider my ISA investments to be long term and an eventual supplement to my pension

However, I would be grateful for any assistance if there are any other points I should raise/question. For instance, why do they use different rates of return for inside and outside an ISA?

The brokers explanation for how they worked out their offer is:

This figure is calculated assuming the ISA investment (GBP10,200)would have attracted a 7% compound rate of return over a 10 year period. This would see a return of GBP 20,065.

For purposes of the calculation it is assumed that the same investment outside of the ISA would receive 6% compound interest over the same period. This comes out at GBP 18,267.

Capital Gains Tax (CGT) of 18% is then taken in to account on the non-ISA calculation. This totals GBP 1,452 brings the total return on the non-ISA calculation down to GBP 16,815.

In order to compensate the loss at the end of the 10 year period, the amount of GBP 1972 is offered. At the end of the 10 year period, based on the 6% compound return, this would total GBP 3,532. This would cover the CGT on the initial compensation figure (GBP 281) and the shortfall of the investment (GBP 3251).


Many thanks in advance.

Regards
Sunil

Replies

  • AegisAegis Forumite
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    At the very least I'd be questioning their use of the 18% tax bracket for you in 10 years time. Tell them you want the 28% bracket to be used as the current maximum potential loss over that time.

    Can''t hurt to argue that the ISA would likely have been running for at least 20 years, especially if it happens to be a repayment vehicle for your mortgage, for example, but I would expect them to resist that very strongly.

    Best of luck with getting it sorted out in any case!
    I am an Independent Financial Adviser
    Anything I say on the forum is for discussion purposes only and should not be construed as personal financial advice. It is vitally important to do your own research before acting on information gathered from any users on this forum.
  • gt94sss2gt94sss2 Forumite
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    Aegis wrote: »
    At the very least I'd be questioning their use of the 18% tax bracket for you in 10 years time. Tell them you want the 28% bracket to be used as the current maximum potential loss over that time.

    Can''t hurt to argue that the ISA would likely have been running for at least 20 years, especially if it happens to be a repayment vehicle for your mortgage, for example, but I would expect them to resist that very strongly.

    Best of luck with getting it sorted out in any case!

    Many thanks.

    I will be asking them to use the 28% CGT rate instead of 18% and recognise that I would be paying additional tax on non-ISA dividends during this period - as well as asking them to extend the period itself.

    Regards
    Sunil
  • Without knowing your broker's thought process or your situation and investment history (e.g. have you fully invested in previous years, what investment types you typically use, if there's evidence of your investment timeline) I'd guess the following:
    -Lower growth rate for non-ISA investment due to income tax on distributions
    -7% growth rate representing a 7.5% growth net of fees, or perhaps just an 'average' rate of return (don't know too much about ISAs but 7% is a standard 'medium growth rate' for pension predictions). Even if this is slightly below the ombudsmans's growth rate, it's still a full percentage point above the non-ISA growth rate which is slightly more in your favour than it needs to be
    -Ombudsman says they assume your tax situation will be the same at the end of the 10 years as it is now - so if you're currently in a position where you'd be paying 28% then you should be able to lobby for that to be used, but if not you might be out of luck
    -Asking them to project over a longer period is likely to be very tough unless you have convincing evidence but can't hurt to give it a go!
  • gt94sss2gt94sss2 Forumite
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    Without knowing your broker's thought process or your situation and investment history (e.g. have you fully invested in previous years, what investment types you typically use, if there's evidence of your investment timeline)

    Thanks for your comments. Have to admit that I am also struggling somewhat with how the broker has calculated the initial compensation figure.

    For instance, I am not sure how they have got to the GBP 281 figure "representing CGT on the initial compensation figure" (as per my original message).

    Some background information you may find helpful;
    I have subscribed the full amount into a self select ISA for a number of tax years but have not always invested the money immediately depending on the markets.

    My investment strategy tends to be buy and hold for the long term - hence I have some holdings going back 10-12 years or longer. Not all my shares ISAs are with this broker.

    The broker in question doesn't have any annual fees on their ISA accounts.

    As for my tax situation, I can virtually guarantee I will be a higher rate tax paper in 10 years time.. and I know the FOS guidance does say assume unless can be shown otherwise.

    Regards
    Sunil
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