Two cash ISAs in same financial year

jbuchanangb

I closed my Coventry BS ISA in July (0.85% reducing to 0.35% at end August) and moved my instant access cash to the NS&I Income Bond. Now I have to move it again in November. Am I allowed to open another cash ISA, e.g. Principality BS Web ISA at 0.95%, when I have previously had  a cash ISA in this financial year?

bowlhead99

It's not about whether you have previously 'had' a cash ISA account during the tax year, but whether you have previously 'subscribed to' that other cash ISA during a tax year, i.e. put new money into it; you shouldn't contribute to two in one year unless you transfer directly between the two, as when you open the new one they will ask you to confirm that you haven't subscribed to another cash ISA in the tax year. 

If you didn't pay in to the Coventry during 2020/21 you would be free and clear with no issues

If you did pay into the Coventry and then withdrew most of the money but kept the account open and it was a 'flexible ISA', you could simply add it back into the Coventry account and do a transfer from Coventry to (e.g.) Principality.

If you had already paid into the Coventry, completely closed it and are now going to pay into the Principality, you can technically get away with doing it - as a 'self-transfer' is allowed as a workaround up to once in a tax year.  HMRC will get a report at the end of the year saying that two ISAs received your money, but if the first one is no longer open at end of the tax year and the total amount of payments from outside an ISA into the two ISA accounts didn't go over the £20k limit, there is probably no issue.

Albermarle

jbuchanangb said:

I closed my Coventry BS ISA in July (0.85% reducing to 0.35% at end August) and moved my instant access cash to the NS&I Income Bond. Now I have to move it again in November. Am I allowed to open another cash ISA, e.g. Principality BS Web ISA at 0.95%, when I have previously had  a cash ISA in this financial year?

Are you sure you need to save in  cash ISA , as opposed to a normal savings account , which usually pay a better interest rate and no problems about how and when you can open them ?
A basic rate taxpayer can earn up to £1000 of interest tax free nowadays , making cash ISA's redundant for the majority of people. 

jbuchanangb

I would agree that I don't need to save in a cash ISA, but flexible ISAs offer a smidgen more interest than easy-access accounts, and every smidgen helps. It appears that I "subscribed" £1,525 into the Coventry ISA this financial year and closed the account on 1 July. On 2 July I deposited the contents of the Coventry ISA, including previous year's "subscriptions", into NS&I Income Bond, which I had opened on 18 June. Even if I add the current balance of the NS&I Income Bond to the £1,525 (which would double count the £1,525), I don't get near to £20,000. So it sounds as though @bowlhead99's workaround applies. If I go to open a new ISA and I am asked about whether I have another ISA in current financial year, how do I answer?

refluxer

The declaration I signed for my last ISA included the following...

"I have not subscribed, and will not subscribe, to another Cash ISA in the same tax year that I subscribe to this Cash ISA"

...so I can't see how the work-around can work, unless you're willing to lie on the declaration ?

bowlhead99

The rules are: you are not allowed to self-transfer, and transfers must go through the new manager through a standard transfer process. You should also not make declarations that aren't truthful. However, it's acknowledged that 'mistakes' may be made by customers, because some customers might be stupid and not read the rules and as long as the breaking of the rule isn't too major, HMRC doesn't want to discriminate too much against stupid people, in the name of equality of access to tax-advantaged products for all

If you open a second Cash ISA in the year and make an incorrect declaration, the new ISA would usually not be valid and HMRC would need to advise how it could be 'repaired' with action by the manager, if eligible for repair.

However as long as all of the original subscriptions  (to the old ISA) were valid, and all current-year money was taken out of the old ISA first before the new subscriptions to the second ISA were made (which happened in jbuchanangb's case), this new ISA does not need to be considered invalid and does not need to be 'repaired'. Simply it can be considered an ‘Investor error’ ISA self transfer and HMRC won't mind (if you only do it once). 

If you do it twice, only the first time you do it is valid. So for example if three different cash ISA managers reported to HMRC that you had subscribed to their product in the year, because there was no official transfer between them, HMRC would know you had broken the rules with subscriptions to three different cash ISAs and as you can't get away with more than one self transfer, your new ISA would not be valid.

As for what to put on the declaration - if you don't make the declaration or follow the formal transfer-in process, they won't let you have an account.  Whereas if you 'make a mistake' and sign off the declaration due to 'misunderstanding' it, and then at some point later (either voluntarily or after a query comes from from HMRC) you tell them that you had made an error and actually the money you were putting in was money that you had pulled out of your old closed cash ISA and put into their new one a couple of months later, the eventual answer will be that this 'self transfer' was acceptable as a one-off, so there is no problem.

FWIW: I don't endorse making false declarations to obtain a tax advantage, as that's not ethical. However, I do recognise that some people make 'mistakes'  or 'errors' in what they do and what they sign off, and that as per the HMRC guidance below, there is no punishment for a first-time 'self transfer' error in that circumstance, and the second ISA would be valid.  The overall result is that you haven't obtained a tax advantage over someone who had followed the rules and transferred the full amount from one place to the other with the proper process. 

________ from https://www.gov.uk/guidance/close-void-or-repair-an-isa-if-youre-an-isa-manager#repair-void ______

‘Investor error’ ISA self transfer

ISA investors must transfer their ISAs through the you. Investors cannot transfer an ISA by closing it and opening a new ISA with the new ISA manager (commonly known as ‘self-transfer’), even if the investor is moving from one ISA product to another with the same manager.

Self-transfer is not available for Lifetime ISAs.

However, where:

the investor subscribes to 2 cash ISAs, in the same tax year

subscriptions to the first ISA subscribed to were valid

all of the current year subscriptions to the first ISA subscribed to were withdrawn (whether or not that ISA was closed) before subscriptions to the second ISA were made

The subscriptions to the second ISA may be valid, subject to the guidance below.

The first cash ISA to be self-transferred in a tax year is valid, and does not need to be repaired.

The second (and any subsequent) self-transferred cash ISA is not valid and is not eligible for repair.

The first cash ISA may be closed and all the funds held in the ISA withdrawn (including any subscriptions for earlier years) or the first cash ISA may remain open and after the self-transfer will hold only subscriptions which were made in previous years. If the ISA remains open, no further subscriptions can be made to it in the tax year of the self-transfer.

See worked examples of repairs and voiding.

refluxer

@bowlhead99 that's very informative - thanks for the clarification.

jbuchanangb

It was a good explanation. I understand now that if I had left £1 in the Coventry BS ISA, I could now close the NS&I Income Bond, and put it in there. I could then open an alternative cash ISA with better rate than the Coventry one, with a proper managed transfer. As the potential additional interest over a year with the ISA versus normal easy-access account looks to be less than £10, on £5,000 investment, I think that, come November, when NS&I drop their rate to zero, I will probably avoid “investor error” and go with normal easy-access.

jimjames

jbuchanangb said:

I would agree that I don't need to save in a cash ISA, but flexible ISAs offer a smidgen more interest than easy-access accounts, and every smidgen helps. 

Which flexible ISA pays more than the best savings account?