Flexible ISA and offset mortgage

Imelda

Me and my husband are in the process of selling and buying a new house.
We are looking to take out an offset mortgage for £250,000.
We have cash ISAs to the value of £160k (this is our safety net money) and I am investigating using flexible ISAs to effectively offset this money for the majority of the year whilst maintaining the tax free wrapper element (my husband's in particular as he is a top rate taxpayer and limited as to what he can put in his pension). I can see that it would work in theory but I wondered if there are any practical issues I should look out for?
plan would be - withdraw the maximum we could without closing the account on April 7th, put it in offset savings, 5th April the following year return it to ISA and repeat until we have saved up enough to completely offset the mortgage (I would probably move the money back earlier just to make sure it arrived in time).

With the ISA money we would be able to almost completely offset from day 1 as we also have some money set aside for our children's school fees too. We would also hope to be able to pay chunks off/ replace the ISA money earlier in the tax year.
We would continue to put £20k each year into our S&S ISAs or would we have to add new money to the cash ISA each year to be able do this?

anything else we should be aware of or consider?
any recommendations for the best flexible ISA providers? Mine is currently with aldermore and it is flexible but they don't seem to be offering new ones which I am not sure would affect our plans?

surreysaver

If you close your ISA, you can only pay in a maximum of £20k into a new ISA each following year.  
With offset mortgages, any savings you are using are tax-free anyway, as they do not pay you interest, because you are paying less interest on your mortgage instead.
Unless your mortgage provider is allowing you to transfer your ISA to them, and allowing you to use it to offset your mortgage?

Imelda

Thanks - we would be looking to use flexible ISAs and not closing them. If we took, say, £50k out as long as we replaced it in the same tax year we wouldn't lose the tax free benefit. I believe Barclays would allow us to offset one ISA but it isn't offering the mortgage product we want.
I just want to know if there is something I haven't considered - for example, would it work if we took out £50k from the cash ISA on 7th April, put £20k into s&s ISA over the course of the tax year and then replaced the £50k into the cash ISA - does it use your allowance for the current year first and then back fill your previous balance and so we couldn't put £20k into s&s ISA.
our aim is to get as much as our savings into ISAs whilst minimising the interest on the mortgage - it is the long term benefit of the ISAs that we are trying to maintain.

Alexland

surreysaver said:

If you close your ISA, you can only pay in a maximum of £20k into a new ISA each following year. 

I think the OP is proposing to keep the flexible ISA open and only do a partial withdrawal (of most of it) at the start of each tax year to put into their offset mortgage before returning the money to the ISA towards the end of the tax year. This is to preserve their historic ISA allowance to give them options for the future and avoid suffering the low rates on cash ISAs. Seems workable to me and assuming they don't actually make any additional contributions they would still have their full current tax year allowance for use in their S&S ISAs.

I would suggest returning the money to the ISA around a month before the end of the tax year as we often hear of problems people have when they try and make contributions around 5th April when a system is offline, payment is rejected / returned, additional ID requested, etc.

Alex

NottinghamKnight

OP what is your purpose in maintaining your isas as if kept in cash they are losing money to inflation every year, isas are very valuable when invested to protect from dividend tax and capital gains tax but of limited if any value when kept in cash. 

Imelda

@NottinghamKnight the long term plan is to shift the cash into S&S ISAs. We have been paying all of our "new" ISA money into S&S ISAs for the past 4 years. Getting my husband to do this has been a difficult task - he is ridiculously risk averse.
Do you know when repaying the money into the flexible ISA whether the old allowance will be filled first or will the first £20k be considered "new" and use the current year's allowance? I want the £20k of new allowance to go into S&S ISA but I assume I could put it into the cash one and then transfer out to make sure?

masonic

Imelda said:

@NottinghamKnight the long term plan is to shift the cash into S&S ISAs. We have been paying all of our "new" ISA money into S&S ISAs for the past 4 years. Getting my husband to do this has been a difficult task - he is ridiculously risk averse.
Do you know when repaying the money into the flexible ISA whether the old allowance will be filled first or will the first £20k be considered "new" and use the current year's allowance? I want the £20k of new allowance to go into S&S ISA but I assume I could put it into the cash one and then transfer out to make sure?

Replacement subscriptions replace previous year money in priority to current year money, So if you initially paid £20k into a cash ISA containing £20k from the previous tax year, then flexibly withdraw £40k, and later replaced £20k, you'd have your full allowance from the current tax year available to either replace in the cash ISA, pay into a S&S ISA, or some combination of the two.

NottinghamKnight

Imelda said:

@NottinghamKnight the long term plan is to shift the cash into S&S ISAs. We have been paying all of our "new" ISA money into S&S ISAs for the past 4 years. Getting my husband to do this has been a difficult task - he is ridiculously risk averse.
Do you know when repaying the money into the flexible ISA whether the old allowance will be filled first or will the first £20k be considered "new" and use the current year's allowance? I want the £20k of new allowance to go into S&S ISA but I assume I could put it into the cash one and then transfer out to make sure?

That's a hell of a cost in terms of investment returns lost over the last few years. There is no difference in what you can invest in between isas and pensions, so maxing pension contributions is normally wise, especially as there s an immediate tax uplift of at least 20% and potentially over 50%. If you want to retain access then a general investment account (GIA) is the unwrapped version, potentially taxable but the first £2k of dividends are tax free (zero rated) and there is a £12.5k cgt allowance every year before you have o pay any tax in investment capital growth that is realised.

Charlton_Taz

This is something I have be doing! Have a flexible isa with Virgin money and have been using the cash we had built up in that isa to offset our first direct mortgage. I have been moving the money back to the isa from mid March just to give a few weeks gap up to 5 April, just in case there were any issues. Then, come 6 April I transfer the cash back against  the mortgage. Both husband and I have been utilising our current isa allowances with share isas elsewhere with no problem at all. To stick to rules don't add any new money to the cash isa though. Works Great! And as you say ensures we preserve a large chunk of isa isa allowance for use in the future.

Imelda

NottinghamKnight said:

Imelda said:

@NottinghamKnight the long term plan is to shift the cash into S&S ISAs. We have been paying all of our "new" ISA money into S&S ISAs for the past 4 years. Getting my husband to do this has been a difficult task - he is ridiculously risk averse.
Do you know when repaying the money into the flexible ISA whether the old allowance will be filled first or will the first £20k be considered "new" and use the current year's allowance? I want the £20k of new allowance to go into S&S ISA but I assume I could put it into the cash one and then transfer out to make sure?

That's a hell of a cost in terms of investment returns lost over the last few years. There is no difference in what you can invest in between isas and pensions, so maxing pension contributions is normally wise, especially as there s an immediate tax uplift of at least 20% and potentially over 50%. If you want to retain access then a general investment account (GIA) is the unwrapped version, potentially taxable but the first £2k of dividends are tax free (zero rated) and there is a £12.5k cgt allowance every year before you have o pay any tax in investment capital growth that is realised.

Like I said - my husband is very risk averse and it is impossible to get him to agree to putting more into S&S.

We maximise pensions - my husband is able to contribute £10k a year, I put my full salary in plus a LISA (husband too old).

Imelda

Charlton_Taz said:

This is something I have be doing! Have a flexible isa with Virgin money and have been using the cash we had built up in that isa to offset our first direct mortgage. I have been moving the money back to the isa from mid March just to give a few weeks gap up to 5 April, just in case there were any issues. Then, come 6 April I transfer the cash back against  the mortgage. Both husband and I have been utilising our current isa allowances with share isas elsewhere with no problem at all. To stick to rules don't add any new money to the cash isa though. Works Great! And as you say ensures we preserve a large chunk of isa isa allowance for use in the future.

So, do you put your new ISA allowance money into a S&S ISA or no new money?
Does Virgin consider the money you put back your "old" allowance that you are repaying?