Could you cash in on this ISA loophole?
Loopholes in the ISA rules allow people to open more than one cash ISA during a tax year, without any objections from the taxman.
Although HM Revenue & Custom (HMRC) only allows savers to open one cash ISA per tax year, it does include two exceptions that mean it is possible to open a second cash ISA without breaching the taxman’s rules.
These loopholes could offer a lifeline to savers over the age of 50 who are concerned they might not be able to benefit from the new ISA allowance because their provider won’t accept top-ups.
And younger savers who have already used their cash ISA allowance this tax year could also take advantage, as rates on new cash ISAs are currently looking more attractive than those on offer at the start of the tax year.
So, what are the loopholes and should you take advantage?
Savers are only allowed to open one cash ISA per tax year, although they may hold ISA accounts from previous tax years. They can also only open one stocks and shares ISA per tax year.
In summary, you can invest up to £7,200 in an ISA, of which £3,600 can be held in cash. However, if you will be 50 or older during the current tax year then, from 6 October, your ISA allowance will increase to £10,200, of which £5,100 can be held in cash.
Since April 2008, HMRC has allowed savers to transfer their cash ISA savings into a stocks and shares ISA without losing their tax-free status.
This is where the first potential multiple ISA loophole comes in. Because, when you transfer your current year’s cash ISA subscription into a stocks and shares ISA, that sum of money is treated for tax purposes as if it had always been put into a stocks and shares ISA.
This means that you are considered to have not subscribed to a cash ISA in that tax year – leaving you free to open a new cash ISA.
However, there are several important points to bear in mind. First of all, a stocks and shares ISA will not provide any guarantee for your capital so, while your return has the potential to be higher compared to cash, you will need to be prepared to take a risk with your money.
Secondly, this is a one-way transaction as you cannot transfer a stocks and shares ISA into cash.
Thirdly, you should look at the cost of opening a stocks and shares ISA. Rebecca O’Keeffe, head of investment products at trading website Interactive Investor, says: “While we don’t charge fees on our stocks and shares ISA, other brokers will charge generic fees. Some will also charge a fee depending on the underlying investments you hold in your ISA.”
This is not the only potential loophole in HMRC’s rules that technically allows you to open more than one cash ISA during a tax year.
The second loophole is more simple than the first. HRMC rules state it will make an exception to the one-ISA-a-year rule as long as the original cash ISA is closed and the money physically withdrawn (thus losing its tax-free status) before the second account is opened.
HMRC gives the example of Mrs Cooper, who put £3,000 into a cash ISA with her bank on 20 April 2008. She closed the account on 30 November 2008, before opening a second cash ISA with another bank on 3 December 2008.
Despite technically having opened two cash ISA within the same tax year, HMRC says “the subscriptions to the second cash ISA are valid”.
This process of closing one cash ISA and withdrawing the money in order to open a second ISA is known as a self-transfer.
Patrick O'Brien, spokesman for HMRC, says: “A single self-transfer is allowed within the ISA rules so this is not a breach at all.”
However, it you open a second cash ISA and fail to close the first, then contributions into the latter account are not valid. In addition, if you exceed the cash ISA allowance then you will be breaching HMRC rules.
O’Brien says: “HMRC collects comprehensive annual information from ISA providers that enables us to identify all individuals who breach the ISA rules.”
There are a number of reasons why you might consider making the most of this second loophole – and a number of reasons why you shouldn’t.
There are concerns that savers over the age of 50 who are hoping to top up their existing cash ISAs may face difficulties. While the majority of banks and building societies have said they will accept top-ups even into closed fixed-rate bonds, some say they will only pay their current rate rather than the interest on offer when the bond was originally opened. Others, such as Yorkshire Building Society, will only pay the original rate if you deposit your additional money during October.
So, if you are over 50 and discover your provider won’t allow you to top-up your cash ISA account opened in the current tax year, then you could ditch the provider and find a new account. Read Moneywise's round-up of the top cash ISAs
Regardless of age, you may decide that the rate you receive on the cash ISA you opened this tax year is no longer competitive – in this case, it might be worth finding a new cash deal offering a better rate.
However, there are a few points to bear in mind. You will lose your tax-free status by closing your original cash ISA and withdrawing the money, and you may lose any interest earned since the account was opened. These losses might offset any extra returns you could make from increasing your overall balance or finding a more competitive account.
Secondly, if you have transferred previous cash ISAs into your current ISA, then any balance over £3,600 (or £5,100 if you’re over 50) will exceed your current tax year ISA allowance and will have to be saved outside of an ISA This means the interest it earns will be taxed.
For this reason, closing your cash ISA in order to open a new one only really makes sense if you have a balance of £3,600 or less (£5,100 or less if you’re over 50).
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.