1-day bridge loan to preserve ISA allowance on flexible ISAs

intalex

Just been thinking about this idea - an offering from banks who already offer a flexible easy access ISA - it would be useful to have the option of an overnight bridge loan to replace withdrawn ISA funds from a flexible ISA, whereby the restorable allowance would be filled via a "drawdown" of this loan on 5th April and repaid on 6th April.

This would entirely be a no-touch solution where the bank would charge a fixed fee % (e.g. 0.1%) for the overnight loan and the customer would only see the relevant transactions appearing on the statement on the morning of 6th April, as follows:

5th April: Deposit X
6th April: Withdrawal -X
6th April: Fee -0.001X

Win-win?

Robin9

Is that what is/was called "Bed and Breakfast" ?

intalex

More like eating 99.9% of your cake and keeping it

masonic

Commonly known as an overdraft.

MoneySavingNovice

Doesn't work.

You can only take money out you put in that tax year to retain the flexibility.

Quoting the Gov website:-

If your ISA is ‘flexible’, you can take out cash then put it back in during the same tax year without reducing your current year’s allowance. Your provider can tell you if your ISA is flexible.

Sorry

intalex

I should have clarified, this "product" would be useful for those who had to withdraw from their flexible ISAs earlier in the year but are not in a position to restore the funds back into the ISA by 5th April... so just buys time and preserves the ISA allowance

surreysaver

But you have to pay it back in during the same tax year. If you are not in a position to do that, then tough.

someone

I think @intalex is talking ensuring a "high tide" is in the account as the tax year changes via some ISA bridging loan product.

e.g.

1. Start tax year 2022/2023 with £150k already in a flexible ISA from the previous tax years
   
2. Withdraw £135k during tax year 2022/2023 (lets say to help a child with a house purchase)
   
3. On the last day of tax year 2022/2023 have a short term loan for £135k (or £155k if you want to "bump up" allowance by using that years allowance) with it been deposited in the account for the sole purpose of getting the amount back at the start of the years.
   
4. On the first day of the new tax year (2023/2024) repayment is made from ISA along with a small charge.
   

Sadly I don't think a direct retail product of some sort would work, nor would the auto withdrawal be permitted.  ISAs have a strict rules regarding how they operate. In simple terms the beneficial owner has to always be the individual and as such can't be used as loan security. It's also in part the reason ISA managers always need to allow transfers away.

intalex

someone said:

I think @intalex is talking ensuring a "high tide" is in the account as the tax year changes via some ISA bridging loan product.

e.g.

1. Start tax year 2022/2023 with £150k already in a flexible ISA from the previous tax years
   
2. Withdraw £135k during tax year 2022/2023 (lets say to help a child with a house purchase)
   
3. On the last day of tax year 2022/2023 have a short term loan for £135k (or £155k if you want to "bump up" allowance by using that years allowance) with it been deposited in the account for the sole purpose of getting the amount back at the start of the years.
   
4. On the first day of the new tax year (2023/2024) repayment is made from ISA along with a small charge.
   

Sadly I don't think a direct retail product of some sort would work, nor would the auto withdrawal be permitted.  ISAs have a strict rules regarding how they operate. In simple terms the beneficial owner has to always be the individual and as such can't be used as loan security. It's also in part the reason ISA managers always need to allow transfers away.

Thanks for explaining it better, that's exactly what I was referring to, but of course you added an excellent point about capturing current year allowance in the bridge loan if it has not been used already.

I'm thinking that the product will in reality be just a "virtual" loan where for a fee the bank will behind the scenes "recognise" the balance as a customer account balance overnight (say from 23:59 to 00:01) rather than their own reserves. Customers won't see anything happen until the next morning when all 3 transactions would show up simultaneously with the dates in my first post. So customers would just sign an agreement with relevant T&Cs beforehand to pay the fee (which could even be (pre-)paid for via a separate way - debited to current account, paid with credit card, etc to keep the ISA tidy) and then the transactions would simply show up on 6th April. The T&Cs would be worded accordingly to state that the drawndown loan (which the customer would not be able to touch anyway) would be the security and also a clause permitting to the instant withdrawal of the loan - I'm sure smart lawyers can find a way to do this.

Banks should easily be able to work out how much allowances have been lost just from not re-instating withdrawn funds by 5th April (ever since flexible ISAs were introduced), and estimate the total value lost from the perpetual loss of tax protection on these funds. For a tax-paying customer at the now higher interest rates, an annual charge of 0.1% for such a bridge loan could be an attractive proposition to preserve and grow their allowances year-on-year especially for those with low savings but are starting to save up more in the coming years.

I wouldn't be surprised if some people already jumped through a few hoops to seek external loans / overdrafts to re-instate their ISA allowances (or to use up their unused pension contribution allowances), but with a simpler and affordable solution, I wonder if demand would be much higher.

How can one grab the attention of a products person at a bank to explore this idea? I know Nationwide and Skipton ISAs are flexible, and Skipton in particular seem pretty savvy with systemising / automating things based on my personal experience as a customer.

MoneySavingNovice

Sorry but that still doesn't work under the rules.

The flexible ISA amount is only applicable to the amount invested (max £20k cash) in that tax year. 

You're going across Tax years

So to take your example

1. Start tax year 2022/2023 with £150k already in a flexible ISA from the previous tax years
   
2. Withdraw £135k during tax year 2022/2023 Now the maximum cash you can invest is £20k for that tax year as the £135 was from previous tax years.
   
3. On the last day of tax year 2022/2023 have a short term loan for £135k (or £155k if you want to "bump up" allowance by using that years allowance) Which you can't do, as you can't reinvest from previous years only the tax year, so the maximum is £20k cash with it been deposited in the account for the sole purpose of getting the amount back at the start of the years. Not posible.
   
4. On the first day of the new tax year (2023/2024) repayment is made from ISA along with a small charge. Pointless because as soon as you remove the £20k in the following tax year you lose the ISA status of that money.
   

intalex

@MoneySavingNovice Flexible ISAs allow you to withdraw and reinstate anything from your ISA balance, regardless of whether it is a current year contribution or a prior year. I've done this before myself, so speaking from experience!