Full ISA Guide Discussion Area

System

mrsalbion wrote: »

I'm confused, and haven't found a thread which answers my particular question, as they all seem to relate to transfers.

I had a cash ISA, into which I have paid money during this financial year (though nowhere near the maximum allowance) but when its bonus rate came to an end a couple of months ago I closed it to pay off our mortgage :j. Can I now open a new ISA and pay in cash up to the balance of my annual ISA allowance?

By way of explanation, at the time I closed the old account, I didn't think I'd be in a position to save any more this year, but I've now decided it would be a good idea to open a new flexible ISA as a better deal than my bank savings account even if the cash can't stay there for the long term (I'd be looking at a couple of withdrawals a year for major annual expenses). I looked at the Northern Rock application form but the words "you can only subscribe to one Cash ISA in each tax year" are confusing me. Obviously you can only hold one ISA at any given time but this implies that as I have subscribed to one, I can't open another, and the transfer rules obviously don't apply.

Reassurance please before I fall foul of the tax man!

Unfortunately, when you apply for a Cash ISA account, one of the declarations that you sign says:

• I have not subscribed and will not subscribe to another cash ISA in the same tax year that I subscribe to this cash ISA

So, the letter of the ISA rules does prevent opening a 2nd Cash ISA and paying in subscriptions in the same year.

However, you may be able to open an instant access type Cash ISA with the same provider as your previous (closed) fixed rate Cash ISA if they are able to report to HMRC that both accounts are part of one ISA wrapper

Mikeyorks

mrsalbion wrote: »

I had a cash ISA, into which I have paid money during this financial year (though nowhere near the maximum allowance) but when its bonus rate came to an end a couple of months ago I closed it to pay off our mortgage . Can I now open a new ISA and pay in cash up to the balance of my annual ISA allowance?

Provided you took all the money (inc any previous year subscriptions) out of the ISA ...... then you can open a fresh one. And you can put in the full allowance (£5340) for this year. You can only do that once.
It's a 'self transfer' and covered at 12.30 to 12.33 of the HMRC guidance. The example after 12.33 is relevant :

http://www.hmrc.gov.uk/isa/isa-guidance-notes.pdf (large file - takes a minute to open)

You would be unwise to attempt to open the fresh ISA with the old provider - for obvious reasons. But otherwise, on the new application, you respond 'no' to the question as to whether you have contributed to an ISA this year. As you no longer have.

System

Mikeyorks wrote: »

Provided you took all the money (inc any previous year subscriptions) out of the ISA ...... then you can open a fresh one. And you can put in the full allowance (£5340) for this year. You can only do that once.
It's a 'self transfer' and covered at 12.30 to 12.33 of the HMRC guidance. The example after 12.33 is relevant :

http://www.hmrc.gov.uk/isa/isa-guidance-notes.pdf (large file - takes a minute to open)

You would be unwise to attempt to open the fresh ISA with the old provider - for obvious reasons. But otherwise, on the new application, you respond 'no' to the question as to whether you have contributed to an ISA this year. As you no longer have.

You are correct that it is possible to get away with opening a 2nd Cash ISA and subscribing after the old account is closed, but those rules say you can only do it ONCE.

And, those rules are also aimed at a "Repair" due to the fact that the investor has broken the rules by subscribing to a 2nd account in the same year as the closed account, and if you read those rules in full...

i.e.

Voiding and repair
12.23
An ISA may be found to be invalid. For example, it may be invalid because the investments held in the account are non-qualifying, or the investor is not a qualifying individual, or the subscription to the account is invalid. Invalid accounts can, in certain circumstances, continue as ISAs after corrective action, or ‘repair’. Invalid accounts that cannot be repaired must be voided.
12.24
Two types of invalid account can be repaired.
a. Where the ISA is invalid because of an inadvertent failure in the checks that should be carried out by the manager (manager error), the manager can sometimes repair the account – see paragraphs 17.39 and 17.61.
(i) Where an ISA is invalid because the investor has subscribed to a disallowed combination of ISAs, (two - or more - ISAs of the same type – see paragraph 3.14), or has exceeded the overall subscription limit
(investor error) the invalid subscriptions to the ISA can sometimes be repaired in full or in part – see paragraph 12.26.

....

12.39
All investments in a repairable ISA lose their tax exemption from the date of the first invalid subscription up to the date of repair. Up to this date the repairable ISA is effectively treated in the same way as a void ISA – see paragraph 12.47. Subscriptions to a repaired ISA for years other than that covered by the notice of discovery are not affected by that notice.

So, the tax exemption may be lost for a period of time whilst the repair investigation is under way.

It's all very complicated, and HMRC do need to clear up this limitation by improving the rules to allow people to subscribe up to the max allowance irrespective of these fixed rate / term - closed accounts.

Mikeyorks

BAA1 wrote: »

You are correct that it is possible to get away with opening a 2nd Cash ISA and subscribing after the old account is closed, but those rules say you can only do it ONCE..

And you quoted my original where I said exactly that? But the 'once' is actually 'once each tax year' ....... albeit you'd be a bit silly to attempt that sort of frequency.

And, those rules are also aimed at a "Repair" due to the fact that the investor has broken the rules by subscribing to a 2nd account in the same year as the closed account,.

No. That's quite wrong. I was referencing the self transfer element. And it's quite clear that provided you 'self transfer' only once (in the year) then 'repair' doesn't enter the equation. As you're not considered to have contributed to two cash ISAs in the year. You've only contributed to one - which you transferred on a DIY basis by withdrawing the cash in entirety and then walking up the road and re-depositing it.

12.32a The first cash ISA to be self-transferred in tax year is valid, and need not be repaired.

System

Mikeyorks wrote: »

And you quoted my original where I said exactly that? But the 'once' is actually 'once each tax year' ....... albeit you'd be a bit silly to attempt that sort of frequency.



No. That's quite wrong. I was referencing the self transfer element. And it's quite clear that provided you 'self transfer' only once (in the year) then 'repair' doesn't enter the equation. As you're not considered to have contributed to two cash ISAs in the year. You've only contributed to one - which you transferred on a DIY basis by withdrawing the cash in entirety and then walking up the road and re-depositing it.

I disagree, I think I am reading the rules correctly and you are not.

The section contents in that document read:

Voiding and repair ....................................... 12.23 to 12.25
.......... Repairs – investor error ........................ 12.26 to 12.29
.......... Repairs – self transfer .......................... 12.30 to 12.33
.......... Repairs – disallowed combination of ISAs . 12.34 to 12.35a

Which hints at the fact the sections 12.26 onwards are sub-sections of the highlighted section heading in bold "Voiding and repair" and the actual specific section you have refered to has a title of "Repairs - self transfer" - so the fact that it says "Repairs" in the title is fairly conclusive that this scenario IS a repair and hence there could be a loss of tax exemption during the repair process.

IMO, it is better not to test this and follow the rules and only subscribe to one Cash ISA wrapper per year.

AirlieBird

BAA1 wrote: »

I disagree, I think I am reading the rules correctly and you are not.

Sorry, but MikeYorks is correct, and you are not. As far as the second ISA manager is concerned the ISA is valid unless HMRC subsequently notify them that it is not. Provided the subscriber fully closed the first ISA before any subscriptions to the second ISA are made, HMRC will not inform the second ISA manager of any breach of the rules and so there will be no repair needed.

HMRC_Guidance_notes_for_ISA_Managers wrote:

For Example
[FONT=Arial,Arial][FONT=Arial,Arial]Mrs Cooper subscribes £3,000 to a cash ISA with Anybank plc on 20 April 2008. She closes it on 30 November 2008, then subscribes to a second cash ISA with Betterhomes Building Society on 3 December 2008. The subscriptions to the second cash ISA are valid. [/FONT][/FONT]

System

AirlieBird wrote: »

Sorry, but MikeYorks is correct, and you are not. As far as the second ISA manager is concerned the ISA is valid unless HMRC subsequently notify them that it is not. Provided the subscriber fully closed the first ISA before any subscriptions to the second ISA are made, HMRC will not inform the second ISA manager of any breach of the rules and so there will be no repair needed.

I still disagree, you are both mistaken.

But, the OP can make their own decision if they want to risk it or not

P.S.
It is a bad idea to follow advice that tells you to make a false declaration on a Cash ISA application.
i.e.
To answer "no" to the declaration :

I have not subscribed and will not subscribe to another cash ISA in the same tax year that I subscribe to this cash ISA

Since you have subscribed to an account - even though that account has been closed, the subscriptions still use up part of this year's ISA allowance, hence it is blatantly wrong to answer "no"

AirlieBird

I agree that ISA savers should follow the rules correctly and not make false declarations and it will always be at the individual's risk when they break the rules. However, the fact remains that the first "self-transfer" in a year is valid. Here is a quote from the Regulatory Impact Assessment when the change was introduced (emphasis mine)

If a saver opens an ISA and in the same tax year transfers it to another

manager by closing down the first account and taking the proceeds to the
second manager (self-transfer) the second ISA is technically invalid because
ISA transfers should be carried out by the ISA manager. The change will
allow the second ISA to be repaired. And, for ISAs subscribed to from 6 April

2003, the transfer will not invalidate the second ISA at all.

I do recommend to mrsalbion that she is best to phone the ISA Helpline to discuss her options with HMRC.

System

AirlieBird wrote: »

I agree that ISA savers should follow the rules correctly and not make false declarations and it will always be at the individual's risk when they break the rules. However, the fact remains that the first "self-transfer" in a year is valid. Here is a quote from the Regulatory Impact Assessment when the change was introduced (emphasis mine)

I do recommend to mrsalbion that she is best to phone the ISA Helpline to discuss her options with HMRC.

Thanks for this additional information which shows that HMRC should have changed the rules after 6 April 2003 so that it was made clear that the 2nd account was valid.
However, the declaration on the application form, and the wording in the rules document has not been updated and hence is misleading. So, I agree with your recommendation that it is best to check the helpline before making any false declaration.

Mikeyorks

BAA1 wrote: »

Which hints at the fact the sections 12.26 onwards are sub-sections of the highlighted section heading in bold "Voiding and repair" and the actual specific section you have refered to has a title of "Repairs - self transfer" - so the fact that it says "Repairs" in the title is fairly conclusive that this scenario IS a repair and hence there could be a loss of tax exemption during the repair process.
.

You're totally wrong. Sections 12.30 to 12.33 are completely free standing and reference 'self transfers. The only reason self transfer is still in that section on Voiding and repair is (12.32a 2nd para) that a :

.. second (and any subsequent) self-transferred cash ISA is not valid and is not eligible for repair

The example at 12.33 is wholly clear - so I'm curious why you're defending the indefensible. The fact the 1st self transfer is valid is stated at 12.32 / 12.32a and 12.33.

BAA1 wrote:

It is a bad idea to follow advice that tells you to make a false declaration on a Cash ISA application.

No more of a false declaration than anyone transferring by using the more normal method of an application form / transfer form via the new provider. If you answer 'Yes' to that question on the application .... you don't get a new ISA. So you scrawl 'Transfer' across it or you take it in and they answer / accept 'No'. Because - at the end of the day - it isn't a new ISA. It's just the original - that will move providers.
A self transfer is no different - it's just that you're moving the original but on a DIY basis.

BAA1 wrote:

Since you have subscribed to an account - even though that account has been closed, the subscriptions still use up part of this year's ISA allowance, hence it is blatantly wrong to answer "no"

There would be no in-year transfers were that the case. As the account being transferred from is 'closed' as soon as it is empty. And - in the self transfer case - the subscription does not use up part of the allowance. You have to close the account in entirety - so you are allowed to subscribe the full current year allowance to the new ISA you open.

BAA1 wrote:

Thanks for this additional information which shows that HMRC should have changed the rules after 6 April 2003 so that it was made clear that the 2nd account was valid

12.32 / 12.32a and 12.33 have all been amended to reflect exactly that.