Proposed £100k ISA lifetime limit

EthicsGradient

There's one thing in the paper that surprised me: the cost to HMRC of the tax breaks for the Enterprise Investment Scheme (EIS) is wholly in the top decile of income, and it's 70% of the cost of the ISA tax breaks for that decile (average £221/household for EIS, compared to £319 for that decile for ISAs, or £242 for the 8th decile for ISAs).

I've never looked into EIS schemes, but on the surface they seem very generous to the investor: from a table here, if you invested £100,000 in each of 4 firms, and 1 failed totally, 1 lost 50%, 1 broke even, and 1 gained 50% in their actual value (so, without tax incentives, they'd be worth 75% of what you invested), with the EIS breaks, you'd end up £60,500 ahead.

So I can see why people who can (you need a tax bill large enough to be able to take deductions from) would use them. You don't even have to pick successful companies to make a profit (pick one that breaks even, and one that loses 50% of the money, and you'll still be 9.5% ahead). No doubt the idea is to encourage investment in start-ups, but I wonder if throwing money at the people with the spare wealth and time/money managers to work through the mechanics is the right way to do that.

masonic

jimjames said:

masonic said:

In practice this would be a complete nightmare to implement. ISA allowance is effectively dependent on the total you have saved and invested across the ISAs you hold, which for many people will fluctuate from one day to the next. 

I agree but it's something the government have in place for pensions with the lifetime allowance and the annual contribution limits so it is technically possible to put something in place. Not suggesting that it is a good idea at all but the limit of £20k per year does seem pretty generous in comparison to other countries.

While I wouldn't describe the pension LTA as an elegant solution, it works quite differently than what is being suggested here, and the product is more amenable to such meddling. ISAs are designed to be easy access and don't benefit from tax relief (which conceptually is what is being clawed back by the pensions LTA). All that is being proposed (if I am reading correctly) is to stop people from contributing more cash while they are above £100k across their ISAs, not pierce the tax free wrapper. As part of a major overhaul, where ISA managers moved to live reporting and the annual allowance was centrally controlled in real time, this could be workable, remove the possibility of people making mistakes and oversubscribing, and remove the need for a one ISA of each type rule. Though I doubt there would be a net saving after all of that infrastructure was paid for.

Agree that the annual allowance is high and if the lost tax revenue is a concern, it would be better to set this at an appropriate level rather than retaining a situation whereby someone could hit the cap within 5 years.

Sea_Shell

As a couple, literally on this cusp (depending on how the market has performed one day to the next), my thoughts on this are...

Would it be based on a limit on the way in?

Would it include growth?

Average balances over each tax year?

Calculated like CGT so only at the point of gain realised.


The logistics of implementing something like this will be horrendous.


Owe 'tax' one day, but none the next?


It'd have to be hybrid ISA/CGT allowance....messy.

masonic

Sea_Shell said:

The logistics of implementing something like this will be horrendous.
Owe 'tax' one day, but none the next?
It'd have to be hybrid ISA/CGT allowance....messy.

There are no answers to your questions, as no detail has been proposed, but agree about the logistics.

One further possible consequence, is that detailed record keeping could be required by anyone investing in a S&S ISA, since there would no longer be a guarantee that disposals would be free of CGT implications.

"Your ISA portfolio is worth £95k? Quick, sell everything and switch funds!"

In all seriousness, it does just look to me like they'd stop you making new subscriptions and anything within the ISA would remain tax free.

Sea_Shell

masonic said:

Sea_Shell said:

The logistics of implementing something like this will be horrendous.
Owe 'tax' one day, but none the next?
It'd have to be hybrid ISA/CGT allowance....messy.

There are no answers to your questions, as no detail has been proposed, but agree about the logistics.

One further possible consequence, is that detailed record keeping could be required by anyone investing in a S&S ISA, since there would no longer be a guarantee that disposals would be free of CGT implications.

"Your ISA portfolio is worth £95k? Quick, sell everything and switch funds!"

In all seriousness, it does just look to me like they'd stop you making new subscriptions and anything within the ISA would remain tax free.

So with my "I'm alright Jack" hat on, I'd be ok with that, as we have no new money to add in these days of deaccumilation 😎

InvesterJones

masonic said:

Sea_Shell said:

The logistics of implementing something like this will be horrendous.
Owe 'tax' one day, but none the next?
It'd have to be hybrid ISA/CGT allowance....messy.

There are no answers to your questions, as no detail has been proposed, but agree about the logistics.

One further possible consequence, is that detailed record keeping could be required by anyone investing in a S&S ISA, since there would no longer be a guarantee that disposals would be free of CGT implications.

"Your ISA portfolio is worth £95k? Quick, sell everything and switch funds!"

In all seriousness, it does just look to me like they'd stop you making new subscriptions and anything within the ISA would remain tax free.

Making it purely based on a 100k contribution limit rather than value of the contents would make it far easier to track/keep records too. I suppose there's the question of whether withdrawals should allow you to claw back this contribution limit - much simpler if not, but if so it's only the same kind of calculation already done for CGT.

Qyburn

InvesterJones said:

Making it purely based on a 100k contribution limit rather than value of the contents would make it far easier to track/keep records too. I d of calculation already done for CGT.

Do HMRC have records of all contributions made to date? I know I don't and am not sure I could even work out where to look for the data.

eskbanker

Qyburn said:

InvesterJones said:

Making it purely based on a 100k contribution limit rather than value of the contents would make it far easier to track/keep records too. I d of calculation already done for CGT.

Do HMRC have records of all contributions made to date? I know I don't and am not sure I could even work out where to look for the data.

ISA providers have always been obliged to report all ISA contributions to HMRC - whether they've all actually complied with this or whether HMRC still have access to them all are separate subjects though....

masonic

Qyburn said:

InvesterJones said:

Making it purely based on a 100k contribution limit rather than value of the contents would make it far easier to track/keep records too. I d of calculation already done for CGT.

Do HMRC have records of all contributions made to date? I know I don't and am not sure I could even work out where to look for the data.

They would, as they receive annual returns from all ISA managers. Though if you had withdrawn money, they wouldn't know about that (other than flexible withdrawals of current year money).

Withdrawals ought to be taken into account. Otherwise it would be rather unfair on someone who had saved up £100k over a decade or more and used it to buy their first home, only to find they can never contribute to an ISA again.

eskbanker

masonic said:

Withdrawals ought to be taken into account. Otherwise it would be rather unfair on someone who had saved up £100k over a decade or more and used it to buy their first home, only to find they can never contribute to an ISA again.

Surely rule #1 of any sort of initiative like this is that it can never be implemented in such a way as to be fair to everyone - someone will always be disadvantaged relative to others?