Flexible Cash ISA and S&S ISA rules

Reed_Richards

isasmurf said:

HMRC guidance to ISA managers
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• all of the current year subscriptions to the first ISA subscribed to were withdrawn (whether or not that ISA was closed) before subscriptions to the second ISA were made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The first cash ISA may be closed and all the funds held in the ISA withdrawn (including any subscriptions for earlier years) or the first cash ISA may remain open and after the self-transfer will hold only subscriptions which were made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.

How does an ISA manager "repair" and ISA?  

isasmurf

Reed_Richards said:

isasmurf said:

HMRC guidance to ISA managers
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• all of the current year subscriptions to the first ISA subscribed to were withdrawn (whether or not that ISA was closed) before subscriptions to the second ISA were made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The first cash ISA may be closed and all the funds held in the ISA withdrawn (including any subscriptions for earlier years) or the first cash ISA may remain open and after the self-transfer will hold only subscriptions which were made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.

How does an ISA manager "repair" and ISA?  

HMRC writes to the ISA manager to tell them the ISA is invalid and needs to be treated as a taxable savings account. They instruct the manager how much, if any, of the invalid deposits can regain ISA status and how much needs to be removed. From the date of notification the deposits that can regain ISA status will return to being an ISA. The general principle is deposits in invalid ISAs will be returned to ISA status up to the annual subscription limit combined across all the saver's ISAs

For example, if a saver subscribes £15,000 to a cash ISA and £9,000 to a second cash ISA in the same tax year, all of the 2nd ISA will be invalid and will be subject to tax. But as the saver has £5,000 of their £20,000 allowance unused from the valid cash ISA then £5,000 of the invalid ISA will be allowed to regain ISA status from the date of notification and £4,000 will be removed. 

jimjames

masonic said:

Not from my reading of ISA Regulations, reg 4, paragraph (1B) part (e). You would also be required to make an ISA declaration stating:

"‘I declare that all subscriptions made, and to be made, belong to me. I am 16 years of age or over. I have not subscribed/made payments, and will not subscribe/make payments more than the overall subscription/payment limit in total to a cash ISA, a stocks and shares ISA, an innovative finance ISA, and a Lifetime ISA in the same tax year."

I can't see that the above can be reasonably interpreted in any way other than you cannot exceed the annual allowance at any time during the tax year. 

Thanks that's really helpful.

It does mean I think that I'd be able to pay £20k in to cash ISA at the start of the year and drop the balance during the year as the money goes into S&S ISA.

masonic

jimjames said:

masonic said:

Not from my reading of ISA Regulations, reg 4, paragraph (1B) part (e). You would also be required to make an ISA declaration stating:

"‘I declare that all subscriptions made, and to be made, belong to me. I am 16 years of age or over. I have not subscribed/made payments, and will not subscribe/make payments more than the overall subscription/payment limit in total to a cash ISA, a stocks and shares ISA, an innovative finance ISA, and a Lifetime ISA in the same tax year."

I can't see that the above can be reasonably interpreted in any way other than you cannot exceed the annual allowance at any time during the tax year. 

Thanks that's really helpful.

It does mean I think that I'd be able to pay £20k in to cash ISA at the start of the year and drop the balance during the year as the money goes into S&S ISA.

Yes, you are allowed to effectively self-transfer current year money between a flexible ISA and another ISA of a different type, which can be useful if you want to drip-feed a lump sum into S&S.

Reed_Richards

Some of these manoeuvres seem to be treading a fine line between the spirit of the rules on one side and what you are allowed to get away with (based on the presumption that you acted in error) on the other side.

masonic

Reed_Richards said:

Some of these manoeuvres seem to be treading a fine line between the spirit of the rules on one side and what you are allowed to get away with (based on the presumption that you acted in error) on the other side.

You're entitled to your opinion of course, but HMRC interpret and enforce the legislation, and explicitly state that if current year subscriptions are flexibly withdrawn they can be replaced in any valid ISA for that tax year. I tend to agree with HMRC that this is fine and fully within the spirit of the rules. Of course if you don't fully understand the rules it is safer to err on the side of caution. Regular readers of this board will have seen this come up many times before, so will be quite comfortable with the concept.

https://www.gov.uk/guidance/manage-isa-subscriptions-for-your-investors#f-isa

Reed_Richards

masonic said:

https://www.gov.uk/guidance/manage-isa-subscriptions-for-your-investors#f-isa

This was not the example that was uppermost in my mind when I gave my opinion on manoeuvres advocated in this thread.  .  In fact this one seems quite reasonable.