New £12,000 limit on Cash ISA

Aretnap

dcs34 said:

Aretnap said:

People have short memories. 

The cash ISA limit was lower than the total ISA limit until 2014. In those heady days to stop people gaming the system 

(1) Money could not be transferred from a S&A ISA to a cash ISA (though it could be transferred the other way) 
(2) Interest paid on a cash balance in a S&S ISA was taxable
(3) Very low risk investments such as money market funds, short dates gilts, or funds comprising mainly short dated gilts could not be held within a S&S ISA

AFAIK the government hasn't published the finer details of how they will stop people using S&S ISAs as surrogate cash ISAs this time round, but all of these restrictions strike me as fairly easy to reintroduce.

I guess a key difference is the ISA landscape (especially S&S ISA market) is now much more dominated by new fintech / app-based accounts and more 'DIY'-style investing (i.e. less regulated oversight) compare to the 2000s/2010s?

It was easier to have faith you were following all the rules when you had to get a physical share certificate from a company; more chance to fall foul of the rules if one just has to press a couple of buttons on your smartphone...

There was no shortage of DIY investing and Internet share dealing before 2014.

Assuming something like the 5% test were reintroduced, I doubt whether it would be the job of individual punters to ensure that their investments were compliant. It would be for the platforms to enforce - money market funds, gilts with less than 5 years to maturity etc would simply not appear on the menu when you clicked "buy-.

Aretnap

phlebas192 said:

Aretnap said:

People have short memories. 

The cash ISA limit was lower than the total ISA limit until 2014. In those heady days to stop people gaming the system 

(1) Money could not be transferred from a S&A ISA to a cash ISA (though it could be transferred the other way) 
(2) Interest paid on a cash balance in a S&S ISA was taxable
(3) Very low risk investments such as money market funds, short dates gilts, or funds comprising mainly short dated gilts could not be held within a S&S ISA

AFAIK the government hasn't published the finer details of how they will stop people using S&S ISAs as surrogate cash ISAs this time round, but all of these restrictions strike me as fairly easy to reintroduce.

 - back then all interest was taxed at source (unless you applied for it to be paid gross because of low income) so it was simple for HMRC to collect tax from cash interest within an ISA. Since that's no longer the case, are people going to have to declare S&S ISA interest?

I imagine it need be no different from the way HMRC collects interest from a non-ISA account (which are no longer taxed at source either). The provider just reports the interest to HMRC and in most cases HMRC just collected the tax next year through your tax code. Tax return needed if you don't do PAYE.

phlebas192 said:

Aretnap said:

People have short memories. 

The cash ISA limit was lower than the total ISA limit until 2014. In those heady days to stop people gaming the system 

(1) Money could not be transferred from a S&A ISA to a cash ISA (though it could be transferred the other way) 
(2) Interest paid on a cash balance in a S&S ISA was taxable
(3) Very low risk investments such as money market funds, short dates gilts, or funds comprising mainly short dated gilts could not be held within a S&S ISA

AFAIK the government hasn't published the finer details of how they will stop people using S&S ISAs as surrogate cash ISAs this time round, but all of these restrictions strike me as fairly easy to reintroduce.

- there were supposed to be other limits on cash held within a S&S ISA (and previously PEP) but AFAIK that was never enforced - I certainly held significant amounts (>25%) for several years.

Indeed, there was no specific limit to how much cash you could hold for how long, but if the ISA manager thought that you obviously had no intention of ever investing it then in theory he was supposed to return it to you. It was rarely enforced, and it didn't really matter if there was no tax advantage to keeping cash in a S&S ISA for long periods anyway. 

phlebas192 said:

Aretnap said:

People have short memories. 

The cash ISA limit was lower than the total ISA limit until 2014. In those heady days to stop people gaming the system 

(1) Money could not be transferred from a S&A ISA to a cash ISA (though it could be transferred the other way) 
(2) Interest paid on a cash balance in a S&S ISA was taxable
(3) Very low risk investments such as money market funds, short dates gilts, or funds comprising mainly short dated gilts could not be held within a S&S ISA

AFAIK the government hasn't published the finer details of how they will stop people using S&S ISAs as surrogate cash ISAs this time round, but all of these restrictions strike me as fairly easy to reintroduce.

 - S&S ISAs could only be transferred to another S&S ISA. They can now be transferred to cash ISAs.

That one would be very easy to reimplement. Technically easy at least - I suppose it might be unpopular. S&S ISAs can be transferred to cash ISAs until they can't be.

SloughSally

So what happens to Sterling short term money market funds already held within a S&S ISA?

wmb194

dcs34 said:

Aretnap said:

People have short memories. 

The cash ISA limit was lower than the total ISA limit until 2014. In those heady days to stop people gaming the system 

(1) Money could not be transferred from a S&A ISA to a cash ISA (though it could be transferred the other way) 
(2) Interest paid on a cash balance in a S&S ISA was taxable
(3) Very low risk investments such as money market funds, short dates gilts, or funds comprising mainly short dated gilts could not be held within a S&S ISA

AFAIK the government hasn't published the finer details of how they will stop people using S&S ISAs as surrogate cash ISAs this time round, but all of these restrictions strike me as fairly easy to reintroduce.

I guess a key difference is the ISA landscape (especially S&S ISA market) is now much more dominated by new fintech / app-based accounts and more 'DIY'-style investing (i.e. less regulated oversight) compare to the 2000s/2010s?

It was easier to have faith you were following all the rules when you had to get a physical share certificate from a company; more chance to fall foul of the rules if one just has to press a couple of buttons on your smartphone...

Shouldn't be a problem; based on your status e.g., retail vs professional, a "sophisticated" investor or not and the type of account and its restrictions, stockbrokers have always acted as the gatekeepers on what you can and cannot buy.

Aretnap

SloughSally said:

So what happens to Sterling short term money market funds already held within a S&S ISA?

At the moment it's all guesswork. The easiest way to deal with existing cash-like investments (politically and technically) would probably be to prohibit further purchases while allowing existing holdings to be kept within the ISA wrapper. But I'm not sure that there's any reason in principle why the rules couldn't be changed to require them to be sold or transferred to a non-ISA account.

masonic

hoc said:

This is written by the most senior editor of Morningstar UK:

"From April 2027, the maximum that people will be able to hold in cash tax-free in an ISA will be £12,000. The overall cash ISA allowance of £20,000 will remain, meaning any money held above that £12,000 threshold must be invested in stocks and shares to remain free of tax."

https://global.morningstar.com/en-gb/personal-finance/rachel-reeves-autumn-budget-what-new-tax-isa-pension-changes-mean-you

Perhaps he has accidentally revealed the next twist.

The government ditched the 2% addition to income tax at the last minute so we have an increasingly complicated scheme of values. In modern speak it is bound to be 'simplified' in the next year. LISA elimination will be the first step. Then the dominoes fall.

It seems rather unlikely that the annual allowance will be changed to a lifetime allowance at this level. Or that most other financial commentators have missed this.

masonic

Aretnap said:

SloughSally said:

So what happens to Sterling short term money market funds already held within a S&S ISA?

At the moment it's all guesswork. The easiest way to deal with existing cash-like investments (politically and technically) would probably be to prohibit further purchases while allowing existing holdings to be kept within the ISA wrapper. But I'm not sure that there's any reason in principle why the rules couldn't be changed to require them to be sold or transferred to a non-ISA account.

There is an existing rule that says if an investment becomes ISA-ineligible it must be removed from the ISA wrapper. This has happened for example when there has been a corporate action that takes a share investment out of a recognised exchange.

trickydicky14

MA260 said:

You would expect restrictions on transfers between Cash and S&S ISA's otherwise people would just put money in S&S ISA and transfer to Cash. If the aim of the change is not to raise tax revenue but to encourage people to invest then you would expect them to leave things broadly as they are as they are halfway to getting someone to invest if they open a S&S ISA and put 8K in it. They are not going to get a great deal of tax revenue on 8K sitting in a ISA.   

If restrictions are put in place to stop money in S&S being moved to cash ISA's what happens to those who correctly wish to de-risk later in life and move money into safer accounts. These are people who are not out to use a loophole but people who may have invested for years.

Kim_13

trickydicky14 said:

MA260 said:

You would expect restrictions on transfers between Cash and S&S ISA's otherwise people would just put money in S&S ISA and transfer to Cash. If the aim of the change is not to raise tax revenue but to encourage people to invest then you would expect them to leave things broadly as they are as they are halfway to getting someone to invest if they open a S&S ISA and put 8K in it. They are not going to get a great deal of tax revenue on 8K sitting in a ISA.   

If restrictions are put in place to stop money in S&S being moved to cash ISA's what happens to those who correctly wish to de-risk later in life and move money into safer accounts. These are people who are not out to use a loophole but people who may have invested for years.

It would be fairly simple to say you may only transfer from S&S to cash if you are above the age of 65, just as the cash allowance is unchanged for them. Whether that age will be lowered in future remains to be seen.

Aretnap

trickydicky14 said:

MA260 said:

You would expect restrictions on transfers between Cash and S&S ISA's otherwise people would just put money in S&S ISA and transfer to Cash. If the aim of the change is not to raise tax revenue but to encourage people to invest then you would expect them to leave things broadly as they are as they are halfway to getting someone to invest if they open a S&S ISA and put 8K in it. They are not going to get a great deal of tax revenue on 8K sitting in a ISA.   

If restrictions are put in place to stop money in S&S being moved to cash ISA's what happens to those who correctly wish to de-risk later in life and move money into safer accounts. These are people who are not out to use a loophole but people who may have invested for years.

Same as the situation was before 2014 I guess - they could de-risk within the ISA wrapper by moving to lower-risk (but not zero-risk) investments. If they wanted to de-risk entirely (not that moving to cash IS actually de-risking entirely) they'd have to move it to a taxable account.

As mentioned already, the ability to keep a large amountsl of cash in a tax free environment is a generous tax break which isn't available in most other developed countries - it's not a God-given human right.

Or the government might decide to placate the pensioner vote by allowing S&S to cash transfers to continue above a certain age. We shall see.