The UnderGovernor’s ISA and ISA schemes were sold to UK tax payers as part of the overall reforms to the ISA system in November 2010. The fixes in money transfer, as well as the newISA, were announced in the budget. However, with the new rules in place, questions have arisen as to how much will the taxpayer save by transferring their ISA to the new scheme, and whether they are scheme that is still worth the money transfer.
A review of the transfer value of each ISA from 2009/2010 to 2010/2011 has revealed that ISAs previous year remained largely unchanged from the pre-tax transfer value in 2009/2010. The review also showed that the tax free component of the transfer has remained the same, with the ISA transfer allowance remaining unchanged at £36,apt.
However, the CIS Tax refund ratio the review found has increased with the new tax rules. The tax free component of the transfer standing at 90%, is down from the ATO’s former transfer rate of 80% with the new rules.
However, the tax efficiency component of the transfers is still way low when compared to other income tax tools, which is why there has been a record number of people switching to ISAs.
Planning and investment ISAs were not impacted by the transfer value changes and remains consistent with pre-tax ISAs. The fund option does not involve a transfer of shares, which makes them the most cost effective choice, whereas plans involving a transfer of shares have been more popular.
There are no significant changes to the investment portion of the ISA, other than a reduction in the overall extent of the ISA tax free component from a projected pre-tax transfer of £ive thousand.
There were some significant changes to the non-tax ISAs with tax free and tax efficient components being introduced for planning and investment ISAs.
There were some changes to the indexation of non-tax ISAs with shares included. The existing ISA disregard of shares allowed investments of up to £4,000 be within ISAs, but for the new ISAs a limit on up to £3,000 can be applied. Investments over £3,000 require two years’ ISA planning.
In order to apply the £3,000 limit, individuals would have to transfer their ISAs over the coming year and then transfer the shares from within their ISAs without being liable for any tax. While this may seem like a trivial change, it has a significant effect in that fund managers who seek to move more shares within ISAs will now need to increase the amount of shares within their ISAs to achieve the £3,000 limit.
While the non-tax ISAs are not free from perceived investment restrictions, they are a better overall option when compared to the existing ISAs as they are tax free from the uncomplicated transfer charges. The only potential downside is that the transfer risk associated with non-tax ISAs offers a lower return and the allowance cannot be used for higher value investments. Finally, ISAs do not provide portfolio advice and only provide regular savings and deposit employer contributions.
All non-tax ISAs
Overall, there is no evidence that changes to non-tax ISAs are likely to have a material impact on their ability to achieve the original tax free allowances.
The transfer limits of pre-tax ISAs have remained consistently high, with over £40,000 available to one in five individuals. These figures are likely to remain at similar levels for the next two years as the government introduces further measures to reform the ISA system.