ISAs Individual Savings Accounts

The ISA is a middle class tax benefit, just the sort of thing that a left of centre government will not like.

So when choosing to use one you should consider how it may be treated for tax in the future. For example would withdrawals become subject to income tax.

Should I Have An ISA

Pretty much every UK tax payer is allowed an ISA, this can be a Cash ISA or a Share Dealing ISA or a niche item the First Time Buyer ISA.

If you don't know much about ISAs then there are plenty of details on the web, but basically the big advantage of an ISA is that capital gains are not subject to Capital Gains Tax.

This is of course irrelevant if you don't expect to make more than the exempt amount which is about £11K per year.

Provided that you are paying attention to Capital Gains Tax threshold opening a ISA is not as urgent as it was in the past.

Government has been sensitive to the low interest rates on offer to savers and has made big increases to the amount that can be added to a ISA during the year.

When I started ISAs had a funding limit of about £7K per year but for the 2017-2018 text year £20K can be added, of course there is no guarantee that this limit will not be reduced in the future.

In the 2020/2021 tax year this limit has not changed.

Are There Any Risks With An ISA?

Most experts will tell you to get an ISA, I have one and I do believe that it is the right thing to do. I also believe that there is a significant risk in using one and relying on its tax free status, you need to continually review the political landscape.

Whilst it is not clear how many people hold Share ISAs it does seem reasonable to believe that it is a quite small percentage of the population. I suspect that many non holders regard them, or would regard them if they knew they existed, as another tax break for the rich.

This makes them very easy targets for a government cash grab and I wouldn't be at all surprised to see a government change the rules and apply a tax at the time of withdrawal, whether this would be CGT or some new tax is unknowable.

Jeremy Corbyn's 2017 General Election manifesto brought the very high tax and spend model back into the political mainstream, although unsuccessful that time a Labour government after the next general election is a real possibilty.

After the impact of COVID 19 becomes understood even a Conservative government might find itself looking for policitally acceptable tax grabs.

If you are very risk averse then not having an ISA and using up your exempt amount every year and paying CGT will give you greater confidence in the value of your investment.

The trouble is that this level of caution is that it will cost you so much, however the value of certainty is not something that anyone can decide for you.

On Saturday the 20th of May 2017 The front page of the business section of the Daily Telegraph had the headline "Record number of savers become 'Isa millionaires' after Brexit stock market boost"

Although the view is not common I believe that it is unsafe to rely on being able to sell shares and withdraw the cash from an ISA without any form of tax being levied.

Although the CGT free status is nice ISAs have tendency to trap you with your current broker, you would like to move but you can't quite be bothered. This is because there are often fees associated with them that non ISA accounts offered by the same broker do not have and its a bit of a hassle to transfer an ISA.

If you do want to change brokers and you have an ISA, the rules say that you can transfer the ISA, but what you can not do is sell the shares in your current ISA, take out the cash and create a new ISA account with the new provider. You can't do this because you will run into the annual deposit limit for ISA deposits.

Transferring ISAs is not a particularly competitive area so don't expect that massive amounts of resources have been expended to make this a cheap, quick and easy process, also expect to pay fees to both the new and old provider.

The 2016 EU referendum is a good example of another problem, once you have significant funds, say more than say a year's allowance in your ISA, what happens when you are confused about the market? You can't easily withdraw the funds as you will not be able to put them back when your confidence returns so they are sitting there earning nothing.

Unless you change strategy and buy for a longer hold and to collect dividends.

ISAs And Politics

I have a Share Dealing ISA and I suspect that most serious investors have some form of ISA as well.

I am now drifting towards the view that those with serious capital gains might want to give serious consideration to closing it.

The reason is entirely political, while Keir Starmer doesn't appear to be a radical politician, both he and Boris Jonhson are going to be facing some very serious budgetary issues over the next 5-10 years.

The impact of COVID 19 on borrowing is starting to become clear, currently estimated at around £300 billion.

Since 2009 the UK National Debt has grown from around 40% of GDP to 100% by May 2020, in money terms the UK now owes over 2.3 thousand billion pounds, 2,300,000,000,000. This is roughly £65k per tax payer

At some point and who knows when, the market is going to stop lending on the grounds that not only is their capital at risk but so are the interest payments.

So a tax grab before we get that point seems possible, but by no means certain and I suspect that a Labour government might find it easier than a Conservative one.

Is An ISA A Possible CGT Nightmare?

I remember the pre John Smith Labour party where there a lot of posturing to what used be the called Working Class, although the term is no longer in common use the group of people that it covered are still around.

With a need to raise tax I could see something like.

Stop New Contributions.
In this case no new funds would be allowed to be added to the ISA but funds currently within the ISA would continue to be CGT/Income tax free.

Stopping new contributions is something very easy to sell politically but it is a long term policy with an unpredictable outcome, freezing the annual contribution limit seems very likely as very few people can afford to add the current limit of £20k a year anyway.

ISAs simply cease to exist.
This seems a possible route, the whole ISA concept disappears overnight and the shares are moved back into a normal share dealing account with CGT due at sale time. I can see legal challenges if this were to be done, but also the government winning as they are simply withdrawing a tax allowance from the next financial year.

If you accept this then imagine the position that starting from the Tax Year 2022-2023 Share ISAs cease to exist and at Aug 2022 your holdings are

Company Old - Bought Jan 2014
Company Medium - Bought Jan 2022
Company New - Bought July 2022

and that you wish to sell everything.

Clearly Company New will be subject to CGT, Company Medium and Company Old might or might not be. Only when the law to remove ISAs is created will we know if CGT is to be applied to shares already within an ISA when the ISA ceases to exist.

In the case of Company Medium it may not matter too much, depending upon your circumstances and strategy as the CGT amount would probably be quite small.

In the case of Company Old and the law becoming the sale is subject to CGT then you have over eight years of capital growth, that could be ouch!

It seems likely that moving Company Old out of the ISA now is likely to escape the possible CGT liability, but at the risk of losing the ISAs advantages going forward.

It may even be that for people with very risk averse investments the lack of ISA tax treatment makes their portfolios poor investments.