Managing and maximising your ISAs
An increasing number of new cash ISA products are being sold with additional interest as a bonus percentage, usually for no more than the first year. Investors who do not review their ISA holdings on at least a yearly basis may find that a later interest yield is dramatically less than they expected. Some people with ISA investments believe that it is not easy or even possible to transfer their ISAs from one provider to another.
It’s quite clear from Her Majesty’s Revenue and Customs that investors can transfer their ISAs from one manager to another whenever they want. They may in effect transfer their current year ISA subscriptions (and any related income) and/or all or part of their previous years ISA subscriptions (and any related income). There are two constraints – firstly, if the ISA contains current year subscriptions only the entire account must be transferred, and secondly subscriptions to a stocks and shares ISA can only be transferred to another stocks and shares ISA. However, subscriptions to a cash ISA can be transferred to another cash ISA, or to a stocks and shares ISA.
HMRC also tell us that where current year subscriptions are being transferred from a cash ISA to a stocks and shares ISA, the current year subscriptions are treated for all ISA purposes as if they had been made to the stocks and shares ISA. This means that the investor is regarded as never having subscribed to the cash ISA. Within the overall subscription limit, therefore, the investor may subscribe to a cash ISA later in the current year (with the same or a different provider) without breaching the one-ISA-of-each-type-a-tax-year rule.
The transfer procedures are guided by best practice recommendations from HMRC. When an ISA is transferred, the old ISA provider must give the new ISA provider a notice in writing containing information and a declaration.
HMRC has produced a range of model forms, available on-line for use by investors and managers, to enable the transfer processes. In simple terms, you as an investor should choose an ISA product (if helpful your financial adviser or accountant can advise on product suitability), then speak with the new provider and fill out a transfer form, which should contain a note you send to your existing provider. The new provider will contact your existing ISA provider, sorting out the transfer and preserving your existing ISA tax-free status.
There are two additional points to bear in mind – firstly what you certainly must not do, is withdraw your money from an existing cash ISA, in order to re-invest it yourself in a new ISA, as this breaks the ISA transfer link and you lose the tax benefit for that amount – let the approved transfer process take its course, for which there is a guideline of 15 days maximum for transfer completion. The second point to be aware of is that some ISAs still carry a penalty charge by your current provider for transferring out. Check for this – it should have been made clear to you when you purchased the ISA. As we approach the end of a financial year, now is a good time to check the interest rates on any existing cash ISAs you hold!
If you want to find out more, or need advice about managing your ISAs, contact one of our financial planning specialists who will be happy to help. There is further information about tax free investing on our personal tax planning pages.
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