2008 ISA Rules and Options
From the start of the new 2008-2009 tax year on 6th April 2008, there are some quite major changes to the rules and regulations for investment in Individual Savings Accounts (ISAs).
The new annual investment allowance for ISAs will be £7,200 (increased from £7,000). Within that amount it is permissible to put up to £3,600 in cash, with one provider only, in any tax year, the fiscal year being 6th April to 5th April.
The rest of the allowance of £7,200 may be invested in stocks and shares, and this can either be with the same provider as the cash ISA, or with a different provider. The second part is not dependent on the first, that is you can do the stocks and shares part without putting anything at all in a cash ISA.
So, under the new rules, Mini Cash ISAs and Mini Stocks and Shares ISAs will no longer exist, nor will the term Maxi ISA, they will all just be ISAs, either Cash ISAs or Stocks and Shares ISAs.
The only differentiation will be that, of the two ISAs you may hold in a tax year, one may hold up to £3,600 in cash and one may hold up to £7,200 in stocks and shares based investments, subject to an overall annual limit per tax year of £7,200.
All existing Mini Cash ISAs and the cash component of Maxi ISAs automatically become Cash ISAs from 6 April 2008, you don't need to do anything.
TESSA-only ISAs (TOISAs) will also automatically become cash ISAs.
Mini Stocks and Shares ISAs and the stocks and shares component of Maxi ISAs automatically become stocks and shares ISAs, and again, no action is required..
All Personal Equity Plans (PEPs) automatically become stocks and shares ISAs from 6 April 2008, again, you don't need to do anything.
One great improvement to the ISA rules is that from 6 April 2008 it is possible to transfer money already saved in cash ISAs into a Stocks and Shares ISA, while still retaining the tax free tax status of the ISA tax wrapper.
It is not possible to transfer money from a Stocks and Shares ISA to a Cash ISA, but the ability to switch out of investment temporarily into cash within Stocks and Shares ISAs will still be available, as it is pre 2008 rules for both PEPs and ISAs.
These are generally advantages, particularly the ability to transfer money from a Cash ISA into a Stocks and Shares ISA, which is great. All the rest about TOISAs, etc become Cash ISAs is fine, there is no downside at all.
The only real disadvantage which can be seen is that interest on cash held temporarily in a PEP has not been taxable up to the new rules, but when PEPs become ISAs, the ISA rules will apply, interest on the cash held in ISAs for reinvestment always having been taxable. This ability to hold cash in PEPs for reinvestment has not been very widely used, though, so it should not upset too many people.
One interesting aspect of the changes, which John Major, then Chancellor, couldn't have foreseen when he introduced TESSAs (Tax Exempt Special Savings Accounts) is that cash saved in TESSAs all these years ago can now find its way through TOISAs (TESSA Only Individual Savings Accounts) into investment funds in the form of Stocks and Shares ISAs, while still remaining within the tax wrapper. That surely is quite an interesting result.
Q. What are my ISA investment options now?
A. From April 2008 you will be able to invest in one cash and one stocks and shares ISA each tax year.
The annual ISA investment allowance has now risen to £7,200 per tax year. Up to £3,600 of that allowance can be saved in cash with one provider. The remainder of the £7,200 can be invested in a stocks and shares ISA with either the same or another provider.
For example, you can chose to save £1,000 in a cash ISA with one provider and £6,200 in a stocks and shares ISA with a different provider.
Q. What happens to my PEP?
A. All PEP accounts will automatically become a stocks and shares ISA. You will be able to invest in this re-labelled PEP,which is now a stocks and shares ISA, as long as you haven’t subscribed to another stocks and shares ISA during the current tax year.
Q. What happens to my existing ISAs?
A. Mini cash ISAs, TOISAs and the cash component of a maxi ISA will all be reclassified as ‘cash ISAs’.
Mini stocks and shares ISAs and the stocks and shares component of a maxi ISA will be reclassified as ‘stocks and shares ISAs’.
Q. Will I have to sign any new forms if I want to continue paying in to my ISA?
A. No - as long as you:
saved in that ISA in the previous tax year
signed a continuous application form for that ISA, and
have not already saved in another ISA of the same type (cash or stocks and shares) during the current tax year.
However, if you transfer your ISA to a new provider, you did not sign a continuous application form, or you did not save in your ISA in the previous tax year then you will have to complete a new ISA application form.
Q. Will I have to merge my PEP investments with my stocks and shares ISA investments?
A. No, your existing PEP will just become a stocks and shares ISA, but you can merge the two if you so wish. The changes align the rules for the two schemes.
You will now be able to invest in the full range of wider qualifying ISA investments, including insurance and stakeholder products.
Q. So from now on how will the interest I receive from any un-invested cash held in my former PEP be treated?
A. The ISA manager must deduct a flat rate 20 per cent charge and pay it to HM Revenue & Customs. This rule has always applied to stocks and shares ISAs and will now apply to interest earned on uninvested cash formerly held in PEPs.
Q. How much can I transfer from my cash ISA to a stocks and shares ISA?
A. You can transfer some or all of the money you have saved in previous tax years without affecting your annual ISA investment allowance.
Savers are also able to transfer money saved in the current tax year. Such transfers must be the whole amount saved in that tax year in that cash ISA up to the day of the transfer.
These transfers are subject to the terms and conditions of your ISA providers.
Q. I have transferred part/all of my current year cash subscription to a stocks and shares ISA, can I make any further payments to my ISA this tax year?
A. Yes – provided you haven’t already used up your annual ISA investment allowance of £7,200.
When you transfer your current year cash ISA to a stocks and shares ISA it is as if that cash ISA had never existed. Any money you saved up to the date of transfer will be treated as if you had invested that money directly to the stocks and shares ISA.
For example, if you had saved £2,000 in a cash ISA and then transferred it to a stocks and shares ISA you would be able to make further investments totalling £5,200 in the year. You can either invest all of the £5,200 in a stocks and shares ISA or you could save up to £3,600 in a cash ISA or a combination of both.
Q. How do I transfer the money in my cash ISA to a stocks and shares ISA?
A. Exactly the same way as you would transfer your ISA to another provider.
You will need to select the stocks and shares ISA provider that you want to have your ISA with. This can be your existing provider if they offer a stocks and shares ISA, or you can appoint a new provider.
You then ask the new provider to arrange the transfer.
You must not withdraw the money and invest it in your stocks and shares ISA yourself, as it will count against your annual ISA investment allowance.
Q. Can I also transfer the monies I hold in my TOISA to a stocks and shares ISA ?
A. Yes you can. A TOISA is a cash ISA.
Q. Can I transfer the monies I have invested in my stocks and shares ISA to a cash ISA?
A. No. The ISA rules are being changed to allow the transfer of monies saved in a cash ISA to a stocks and shares ISA but not vice versa.
Q. Can I still transfer my cash or stocks and shares ISA held with one provider to another provider?
A. Yes. The rules on transferring like-for-like ISAs between providers are not changing.
For example, you can still transfer your cash ISA held with one provider to a different cash ISA provider, without affecting your annual ISA investment allowance.
You must ask the new cash ISA provider to arrange the transfer.
You must not withdraw the money and invest it in your cash ISA yourself, as it will count against your annual ISA investment allowance.
Q. Will the qualifying investments of the ISA be changed?
A. No. The qualifying investments rules of the ISA will not change.
But former PEP investments will now be able to invest in the full range of wider qualifying ISA investments, including insurance and stakeholder products.
