Confused

scottyrom76

Play the system to max interest and keep ISA benefits

Taking this to its extreme, there's a nifty trick you could use to keep your money tax-free forever in an ISA while getting a higher interest rate for most of the year.

Let's say you have £50,000 in flexible ISAs, but other savings accounts pay higher interest that you want to take advantage of, and you don't want to lose your ability to keep £50,000 tax-free year after year as you can in a cash ISA. Plus remember the personal savings allowance means you can earn up to £1,000 in interest in non-ISA savings accounts each financial year tax-free.

Here's how:

1. At the start of the new tax year – so from 6 April – withdraw the ISA cash.
2. Put it in (several) high interest accounts.
3. Before 5 April the following year just put it back in the ISA to keep your tax protection.
   
4. Repeat the process again and again.
   

This means your money would be earning more interest for most of the year, whilst still keeping the long-term benefits of an ISA.

The above is posted on MSE (had to exclude links). Is this saying that the interest earned on the higher interest rate savings account during the year wouldn't be taxed because capital plus interest is transferred back into a tax-free ISA by the end of the tax year ? I don't understand the benefit if not. I'm probably just being slow ;-)

fwor

scottyrom76 said:

Before 5 April the following year just put it back in the ISA to keep your tax protection.

Taking cash out of an ISA is a one-way process. You can only put in as much as remains of your £20k/year allowance. You cannot put cash "back into an ISA".

eskbanker

fwor said:

scottyrom76 said:

Before 5 April the following year just put it back in the ISA to keep your tax protection.

Taking cash out of an ISA is a one-way process. You can only put in as much as remains of your £20k/year allowance. You cannot put cash "back into an ISA".

No, you can put money back into an ISA if it's a flexible ISA, hence this being specified in the quoted piece.

https://www.moneysavingexpert.com/savings/flexible-isas/

scottyrom76 said:
Is this saying that the interest earned on the higher interest rate savings account during the year wouldn't be taxed because capital plus interest is transferred back into a tax-free ISA by the end of the tax year ? I don't understand the benefit if not. I'm probably just being slow ;-)

However, the interest earned while outside the ISA is taxable, so the practice isn't as beneficial in the current interest rate environment as it was when the article was written - the benefit is "to keep your money tax-free forever in an ISA while getting a higher interest rate for most of the year" in the scenario where "you have £50,000 in flexible ISAs, but other savings accounts pay higher interest that you want to take advantage of, and you don't want to lose your ability to keep £50,000 tax-free year after year as you can in a cash ISA", but that benefit is heavily diluted (or even negated) if you end up paying significant tax on your interest.

You need to do the maths for your own circumstances to ascertain if it's actually worth doing - like many MSE 'loopholes', it's far from universally applicable and beneficial....

Reed_Richards

scottyrom76 said:

Is this saying that the interest earned on the higher interest rate savings account during the year wouldn't be taxed because capital plus interest is transferred back into a tax-free ISA by the end of the tax year ? 

I don't think it is saying that and it isn't true.  The interest on the savings account is taxable, although whether you actually end up paying tax on it would depend on your particular circumstances.  The only point is if you happen across a regular savings account that pays more interest then the best ISA you can find, so much more that you can pay the income tax on the interest and still be better off.

@fwor doesn't seem to have heard of Flexible ISAs, although they have been around for several years now.  With a Flexible ISA you can withdraw as much money as you like and any money that you pay back within the same tax year does not count against your ISA allowance.      

fwor

Ah - thanks. I probably wasn't the best person to comment as I have never taken any money out of my ISAs!

As said, the MSE wording is a bit misleading, because the money you take out is (of course) subject to tax all of the time that it's outside the ISA - so if you contrive to have it within the ISA for (say) 2 days of the year, it is subject to tax on any interest that it earns for the remaining 363 days.

eskbanker

fwor said:

As said, the MSE wording is a bit misleading, because the money you take out is (of course) subject to tax all of the time that it's outside the ISA - so if you contrive to have it within the ISA for (say) 2 days of the year, it is subject to tax on any interest that it earns for the remaining 363 days.

To be fair, it does say "remember the personal savings allowance means you can earn up to £1,000 in interest in non-ISA savings accounts each financial year tax-free".

Reed_Richards

eskbanker said:
.....

Don't you just hate it when you take so long writing a reply that someone else beats you to it.

scottyrom76

Thanks all, much appreciated, Didn't think the taxman would go for that but I read it several times and couldn't see any benefit for my particular circumstances unless this apparent loophole wasn't taxable. 

razord

Do Flexible ISAs allow you take out more than £20,000 and put it back in though? My understanding was the flexible part was exclusive for the current tax year - so a maximum of £20k could be put back in?

eskbanker

razord said:

Do Flexible ISAs allow you take out more than £20,000 and put it back in though? My understanding was the flexible part was exclusive for the current tax year - so a maximum of £20k could be put back in?

There's no limit to the withdrawal amount, and everything withdrawn can be replaced within the same tax year (plus any unused current year allowance).

scottyrom76

There's no limit to the withdrawal amount, and everything withdrawn can be replaced within the same tax year (plus any unused current year allowance).

But only with the same provider I read......is this correct ?