ISA Bulletin Number 15 - 7 August 2009

The ISA Bulletin keeps ISA managers informed of any new developments relating to the ISA scheme. Please ensure the appropriate people in your organisation read it.

We suggest that you keep Bulletins at the front of your copy of the Guidance Notes for ISA Managers.

What this Bulletin contains

This Bulletin contains an article on:

  • Amendments to the ISA Regulations
  • American Depositary Receipts (ADR) / American Depositary Shares(ADS)
  • Bed & ISA transactions (Share Exchanges)
  • Cash ISA to Stocks and Shares ISA transfers – when can they be reversed?
  • Transfers that cannot be accepted by the new manager
  • Appendix A - generation of a cash subscription by the disposal of existing investments

Enquiries on this bulletin should be addressed to

David Taylor
HM Revenue & Customs (SSO Liverpool)
Room 330
St John’s House
Merton Road
Liverpool
L75 1BB

Telephone: 0151 472 6156

Email: David Taylor

Amendments to the ISA Regulations

ISA Bulletin 13 issued on 4 June included draft ISA amending regulations. These regulations (Opens new window) have been laid (SI 2009No.1994). There is an Explanatory Memorandum (PDF 189K) (Opens new window).

The main change made by these Regulations is to allow Icesave ISA investors to reinvest the compensation they received in respect of their ISA savings in a cash ISA with another ISA manager by using the certificate issued by the Financial Services Compensation Scheme.

Other changes made by these Regulations:

  • all non-EU EEA UCITS (Undertakings for Collective Investments in Transferable Securities) are now qualifying investments for the stocks and shares ISA (subject to the 5% test);
  • where a manager makes a transfer the need to provide a declaration to the new manager is now removed. This is to enable ISA providers to use the Bankers Automatic Clearing Service (BACS) for Cash ISA transfers;
  • where an investor requests a transfer or withdrawal and the ISA includes a qualifying investment in a collective investment scheme which has been suspended in accordance with FSA rules, the requirement that a withdrawal or transfer must be made within 30 days is removed – instead the transfer or withdrawal must be made within 7 days of the suspension ending;
  • the procedures for making non-written ISA applications are now in line with the Child Trust Fund. The ISA manager no longer needs to send a copy of the declaration to the investor. Instead he must make a written declaration on behalf of the investor and notify the investor of its content. Notification can be done, for example, by telephone, e-mail or fax and if corrections are notified by the investor, there is no longer a requirement to issue a new declaration.

American Depositary Receipts (ADR)/American Depositary Shares(ADS)

We have received a number of recent queries about ADR/ADSs. For ISA purposes, the ADR/ADS will only qualify if the underlying security would qualify in its own right for inclusion as an ISA qualifying investment. So managers need to look beyond the listing of the ADR/ADS and check the underlying investment qualifies for the ISA. If it does not, the ADR does not qualify for the ISA.

Bed & ISA (Share Exchanges)

We have been asked to look again at the guidance on Share Exchanges. We have agreed changes with the ISA Manager representative bodies and the revised wording is now attached at Appendix A. This will be incorporated into the Guidance Notes for Managers at the next update.

Cash ISA to Stocks and Shares ISA transfers – when can they be reversed?

We have been asked to clarify the Guidance in paragraph 11.33 about the circumstances in which a transfer from a cash ISA to a stocks and shares ISA can be reversed.

ISA transfers – cooling off and cancellation – background

Under the FSA Handbook (Conduct of Business Sourcebook (COBS)) stocks and shares ISAs attract 14-day cancellation rights (COBS 15) unless the ISA includes a life policy in which case the period is extended to 30 days. (Some providers voluntarily offer a 30 day period for stocks and shares ISAs.). However

  • for distance contracts, COBS 15 Annex 1 1.10R(1) removes the cancellation rights because price will depend on fluctuations in financial markets outside the firm's control
  • for non-distance contracts there is an exception whereby a seven-day pre-contractual right to withdraw (‘cooling off’) is provided instead

What does this mean for ISA transfers?

For distance contracts, cancellation rights or cooling off will apply only where these are included in the product terms and conditions.

For non-distance contracts, there are 14/30-day cancellation rights unless the new ISA manager offers a 7-day cooling-off period instead (see ISA Guidance paragraph 5.7).

  • If the new (Stocks and Shares ISA) manager offers the 7 day cooling off period, the transfer request should not be forwarded to the existing (Cash ISA) manager until the cooling-off period has expired. The investor has seven days to reconsider their decision (the 'cooling off' period). If, during the cooling off period, the investor informs the new (Stocks and Shares ISA) manager that they no longer wish to proceed with the transfer, the new manager should not progress the transfer any further. The transfer request will not be forwarded to the existing (Cash ISA) manager, so the existing manager may not know that a transfer was ever intended. The funds will stay in the cash ISA.
  • If the new manager chooses not to opt for the 7-day cooling off period, there is a 14/30 -day cancellation right. So, if an investor transfers a Cash ISA to a Stocks and Shares ISA, the money would leave the Cash ISA and be transferred to the Stocks and Shares ISA before the 14/30-day cancellation period began. If the investor decides to cancel it is the purchase of the investment in the stocks and shares ISA that is cancelled, not the transfer from cash to stocks and shares. The investor has a Stocks and Shares ISA. They can choose to invest the money in a different investment offered by the new (Stocks and Shares ISA) manager; or withdraw the money from the ISA (see Guidance 11.33) but they cannot move the money back into a Cash ISA (because transferring from a Stocks and Shares ISA to a Cash ISA is not allowed.)

Transfers in that cannot be accepted by the new manager

Sometimes a transfer in cannot be accepted by the new manager – typically because when the Transfer History Form and proceeds are received from the old manager

  • the new manager realises that the amount of current year subscriptions being transferred exceed the annual subscription limit when aggregated with the amount already subscribed with them in the current year.
  • it arrives after the date by which all transfer proceeds must be received for a structured product (or similar) on sale only for a limited time
  • the new manager realises that the terms and conditions of the ISA product in question do not allow transfers in

In these circumstances the new manager will return the cheque to the old manager saying they are unable to accept the transfer, even though they have previously confirmed that they could. This could leave the transfer in 'limbo' as the old manager has followed the instructions to transfer out and a transfer out has happened under the ISA Regulations (notwithstanding the new manager has not processed the transfer in).

Where the old manager is willing and able to do so, they should reinstate the ISA to put the investor back into the position he would have been in had the transfer out never happened.

If the old ISA cannot be reinstated (for example, where the old product is a fixed-rate product that cannot be re-opened once it has been closed) the old manager may offer the investor the opportunity to place the returned/rejected transfer proceeds into another of his ISA products. The old manager would need to treat this as an internal transfer between ISA products otherwise the sum would have to be regarded as an ISA subscription and subject to the annual subscription limits.

If the old manager is not prepared to reinstate the ISA - and he is under no obligation to do so - he should allow the investor to transfer the ISA to another provider so the ISA status of the savings is not lost.

Future articles

Part of the purpose of the ISA Bulletins is to clarify areas of the Guidance Notes for ISA Managers. If you feel that any aspect of the guidance is unclear you should contact David Taylor. His telephone number is 0151 472 6156.

Appendix A

Generation of a cash subscription by the disposal of existing investments

6.12 The direct transfer of shares into an ISA is allowed only where the shares were issued to the investor under a savings-related share option or Share Incentive Plan (paragraph 6.19).

6.13 Investments held by an investor outside an ISA can be sold, and the proceeds subscribed to an ISA. Investors and ISA managers should note that the sale of the investments is a disposal for capital gains purposes.

6.14 The ISA subscription can be used to buy back often the same investments (but not necessarily so) within the ISA provided certain conditions are met. This is a ‘Share Exchange’ (sometimes called ‘Bed and ISAing’) which can apply to units as well as shares.

The conditions that must be met are that

a) the investments must not be purchased from the investor’s spouse, civil partner or from the investor

b) the investments must be bought at the open market price (paragraph 10.7)

c) any stamp duty or stamp duty reserve tax (SDRT) paid on the purchase of the ISA investments must be paid out of cash held in the ISA, and

d) the funds generated by the disposal of the investor’s shares must be available to meet the purchase on settlement day.

The subscription date can be the date on which the investor’s shares/units are sold, the settlement date for the purchase or any date in between that the investor chooses, provided condition (d) is met.

6.15 A new ISA opened in this way can therefore be opened in the tax year in which the investor’s shares/units are sold.

For Example

1 Mr. Patel holds 1000 ord. shares in ABC plc outside his ISA. He instructs his ISA manager to sell the shares, and buy them back in his ISA. The ISA manager sells the shares on the stock market on 15th July 2009, and buys the same number of shares back at the same time. The subscription to the ISA takes place on 15th July 2009.

Even if Mr Patel had waited until, say, 3rd April 2010 to make the transaction, the Share Exchange would be a 2009-10 subscription as the subscription date is the date on which the shares were sold (3 April 2010). The fact that the settlement day falls in the tax year 2010-11 does not affect the date of subscription.

2 Mr Jones holds 1000 ordinary shares in XYZ plc outside his ISA. On 5th April 2010, he instructs his ISA manager to sell the shares, and buy shares in DEF plc in his ISA. He has also completed (and his manager has accepted) an ISA application for 2009-10. The ISA manager sells the XYZ shares on the stock market on 5th April 2010, but is unable to buy the DEF shares until the following day (6th April 2010). The subscription to the ISA takes place on 5th April 2010.

If Mr Jones ISA application had been for 2010-11, the subscription date would be 6th April 2010 (i.e. in the new tax year).