Messed up ISA allowance

Pkman

So randomly I have come across that I have been putting money in for help to buy isa and cash isa in 2018/19 and 2019/20 tax year, i have never thought they are both cash isa. (I mean why did the government create a help to buy isa and not called it help to buy CASH isa, it would be less misunderstanding)

I have also oversubscribed the £20k limit in 2018/19 (£20k cash isa, £2400 h2b, £4000 LISA), honest mistake, in 2019 I did remmeber the limit and put 13.6k cash isa, 4k Lisa, 2.4k h2b (obv still wrong) 

I had the h2b isa from Dec 2015 and have top up the maximum via standing order each month with BANK A.

I have opened a cash isa with BANK B in mid April 2018 and mid April 2019. And when it mature each year, I done the transfer form to BANK C, which I still hold, abit in a different product now. 

 I received interest in 2018/19 £275 and 2019/20 £225 from Bank B. 

After I transfered in, 2019/20 and 2020/21, I got £300, £250, and 2021/22 I will get £350, from total balance of £30k in Bank C. (some of the figure are round up or down to ensure it can't tracked lol) 

As I have maxed out £12k limit in h2b isa, I have stopped the standing order for April. So the error won't happen again (unless government bring out another confusing product lol) 

Anyhow I have not heard from anyone about this error mistake.

 I want to be prepare what could happen, what likely to happen, what's the worst it could happen

And what are my option be? (if any)

Should I come clean now or pretend I didn't figure this out? 

Thanks for reading and I look forward to your comment/advice  

The_Fat_Controller

Any ISA that holds CASH is obviously a CASH ISA !

masonic

Pkman said:

Anyhow I have not heard from anyone about this error mistake.

 I want to be prepare what could happen, what likely to happen, what's the worst it could happen

And what are my option be? (if any)

Should I come clean now or pretend I didn't figure this out? 

Thanks for reading and I look forward to your comment/advice  

It is not unusual for HMRC to let you off your first ever ISA rule breach. However, since yours have occurred in multiple tax years this is less likely to be the case. The worst they can do is declare one of the cash ISAs invalid and require that the money paid into it in the tax year the breach occured is removed and any income made taxable. This will be the second cash ISA you paid money into during that tax year (the first cash ISA being your valid cash ISA for the tax year. If this does not address the oversubscription, then further action could be taken to remove the money that took you over your allowance (i.e. the last money to be paid into one of the ISAs in the tax year concerned). I don't think contacting HMRC vs doing nothing will lead to a different outcome or resolve the matter any more quickly. Perhaps you could argue that the failure to notify you of the problem promptly has resulted in your error being compounded, and that is a reason for greater leniency.

The_Fat_Controller said:

Any ISA that holds CASH is obviously a CASH ISA !

That is clearly not true. A cash LISA holds cash and is not a cash ISA.

virenque

I've got cash in my S&S ISA. It's not a cash ISA. :-)

Pkman

Thanks for the advice. Bit of a follow-up. You said they will let me off the first ISA rule breach (2018/19). Is it for the whole year or oversubscribed/2 cash ISA as I have broken both in one tax year.

If I have to pay tax on the cash ISA in 2019/20, I will accept that as it is my fault. But can I pick which interest tax to pay, as my cash ISA interest was way higher than my h2b isa interest (£200 Vs £90)

Also what will happen to the money for the following year, ie my cash ISA stayed in the cash ISA and I gain interest on those money on top. Same as h2b isa. 

What is the time frame they will notice this? It has been almost 2 years when 2018/19 tax year end, wouldn't they picked it up by now?

cattie

Masonic only said HMRC may overlook the initial isa error. There's no guarantee of this & as Masonic points out, you've over subscribed over more than one tax year, it's quite likely they'll null & void the 2nd isa so no you'll not be able to choose which one gets voided. The first isa opened will be the permitted one. 

Remember that HMRC debts never die, so even if it wasn't picked up for a while, it can possibly be picked up a lot further down the line especially with all the delays due to covid affecting the nation.

masonic

Pkman said:

Thanks for the advice. Bit of a follow-up. You said they will let me off the first ISA rule breach (2018/19). Is it for the whole year or oversubscribed/2 cash ISA as I have broken both in one tax year.

As pointed out above, you cannot count on being let off, but it would be unusual for HMRC to penalise you for your first offence. There is no point speculating what may happen, but it is possible everything you did in 2018/19 could be forgiven.

Pkman said:

If I have to pay tax on the cash ISA in 2019/20, I will accept that as it is my fault. But can I pick which interest tax to pay, as my cash ISA interest was way higher than my h2b isa interest (£200 Vs £90)

Which ISA did you pay money into first in the 2019/20 tax year? That would be your valid cash ISA for the tax year. Remember that there is little likelihood any tax would be payable because you would still have your Personal Savings Allowance to fall back on, but the money subscribed to the second cash ISA would be removed. If the second cash ISA was the HTB ISA, this would mean the loss of up to £600 Government bonus rights you have built up by depositing in the HTB ISA during that tax year.

Pkman said:

Also what will happen to the money for the following year, ie my cash ISA stayed in the cash ISA and I gain interest on those money on top. Same as h2b isa.

If HMRC void or repair the ISA, the money that should not have been subscribed to the ISA will be treated as having never been subscribed to the ISA, so interest paid in subsequent tax years (on that money only) would form part of your normal savings interest for tax purposes.

Pkman said:

What is the time frame they will notice this? It has been almost 2 years when 2018/19 tax year end, wouldn't they picked it up by now?

Based on other people's posts about similar issues, HMRC has been very slow to respond to this type of issue since the start of the pandemic.

Pkman

Hi, thanks for replying back. I have break down your reply in 4 parts.

1) absolutely, just want to be prepared that's all.

2) looking at the record, it would seem the standing order for h2b was done on the 5th April 2019(so part of 2018/19), and I opened cash ISA (and deposit) in 27 April 2019 (2019/20) and the h2b standing order was after this date (in may 2019). I have used up the £1000 PSA every year. So negative on that. Also I don't intend of using h2b for house purchase, would use LISA for it. 

3) So you are saying, HMRC/bank cannot take the interest away from me but can only TAX it(?) 

4) If I withdraw £2400 from the h2b (which I will do regardless due to interest rate is only payable up to £12k and it has over £14.4k) can I say that £2400 subscribe in 2019/20 is no longer in the account

Thanks

masonic

Pkman said:

2) looking at the record, it would seem the standing order for h2b was done on the 5th April 2019(so part of 2018/19), and I opened cash ISA (and deposit) in 27 April 2019 (2019/20) and the h2b standing order was after this date (in may 2019). I have used up the £1000 PSA every year. So negative on that. Also I don't intend of using h2b for house purchase, would use LISA for it.

Then it is as you wish, with the HTB ISA contributions being invalid in the 2019/20 tax year. If you are not going to use the HTB ISA for a house purchase then HMRC being slow to act is not going to be a problem and ultimately could work in your favour.

Pkman said:

3) So you are saying, HMRC/bank cannot take the interest away from me but can only TAX it(?)

The interest that was paid will not be taken away. You will need to pay tax on any interest generated by the invalid subscriptions from the date they were made until the ISA is repaired. That's as well as the subscriptions + interest being moved outside the ISA.

Pkman said:

4) If I withdraw £2400 from the h2b (which I will do regardless due to interest rate is only payable up to £12k and it has over £14.4k) can I say that £2400 subscribe in 2019/20 is no longer in the account

It is unclear what they would do if the HTB ISA holds money from several tax years and the invalid subscriptions are from the middle tax years. For flexible ISAs, withdrawals are treated as coming from the current tax year first before previous tax years. If you wait until the next tax year to withdraw, then all the money will be from previous tax years.

Pkman

Can you explain a little more on 'ISA is repaired'
How can I repair what I have done?
Should I withdraw the £2400 help to buy isa in this tax year or wait until next year? 
Quite honestly, I don't mind withdraw £2400 now and again £2400 come April if I can just fixed all the error.
The interest is only getting 1% tax free. I just want to stop the damage. And I don't have to pay whatever tax because the invalid contributions are still there.

EDIT: infact if I withdraw £2400 (2020/21 contributions), and another £2400 (2019/20 invalid contributions) surely this will fixed all the error (for the future right)???  Last in first out??? 

Thanks

masonic

Pkman said:

Can you explain a little more on 'ISA is repaired'
How can I repair what I have done?
Should I withdraw the £2400 help to buy isa in this tax year or wait until next year? 
Quite honestly, I don't mind withdraw £2400 now and again £2400 come April if I can just fixed all the error.
The interest is only getting 1% tax free. I just want to stop the damage. And I don't have to pay whatever tax because the invalid contributions are still there.

EDIT: infact if I withdraw £2400 (2020/21 contributions), and another £2400 (2019/20 invalid contributions) surely this will fixed all the error (for the future right)???  Last in first out???

You can't repair the ISA yourself, only HMRC (or your provider under the instruction of HMRC) can do that. It is not a good idea to take any action yourself because you don't know what HMRC is going to decide. Nothing you do now will relieve you of the administrative headache of underpaid tax if HMRC decides the money cannot remain in the ISA. The actual interest payable is not likely to be very significant, and 1% net of tax is still fairly competitive in this day and age. It is possible that £2,400 withdrawn after the end of this tax year could be interpreted by HMRC as being the invalid ISA money, but by no means assured.