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ISA Bulletin 2

Savings Schemes Office (SSO)

19 June 2008

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 articles on:

  • Transferring an Individual Savings Account (ISA) - making it more difficult than it need be.
  • Annual Returns of Information - 2009 Magnetic Media Specification now available.
  • Annual Returns of Information - form ISACOM100(OCR).
  • Qualifying investments - db x-trackers - Sterling Money Market ETF.
  • Qualifying investments - Property Authorised Investment Funds (AIFs).
  • Recognised Stock Exchanges - Bond Exchange of South Africa.

Enquiries on this bulletin should be addressed to

David Taylor
HM Revenue & Customs (SSO Liverpool)
Room 320

Telephone 0151 472 6156

email: David Taylor

Transferring an Individual Savings Account (ISA) – making it more difficult than it need be

We have become aware that some managers have mistaken assumptions about the ISA transfer process.

ISAs can be transferred electronically

Some managers tell investors that the ISA Regulations require them to transfer ISAs by cheque. This is wrong: the ISA Regulations say nothing about the method by which an ISA should be transferred. In particular, they do not say that ISAs cannot be transferred electronically. ISA funds may be transferred electronically – and the ISA transfer form may be sent to the new manager electronically.

The transfer form doesn’t have to be signed

It appears that some ISA managers are under the impression that where the old manager sends the new manager a transfer form in paper form (as opposed to electronically), it needs to be signed by someone on behalf of the old manager. The requirement for managers to sign the form was removed some time ago (to help the facilitation of electronic transfers) – see paragraph 11.16 of the Guidance Notes.

ISAs do not have to be rejected simply because the personal information provided differs from that provided to the old manager

Some managers tell us that they reject transfers-in if the personal information provided to them differs from that provided to the old manager. We do not want managers to reject transfers and return the funds to the old manager unless absolutely necessary; we therefore suggest that they apply the following rules:

  • If the new manager can identify the type of ISA (stocks and shares or cash) and whether or not current year subscriptions are being transferred, he should accept the transfer.
  • If there is anything that is unclear, it should be resolved with the old manager and the investor. One common example is where the investor has given the old manager a different National Insurance Number. Often they have transposed a couple of the numbers, something that is very easy to do. Another is where the date of birth differs. Such errors can normally be resolved by contacting the investor. So, a transfer should not be rejected if it’s clear that the correct ISA has being transferred, but some of the personal information given to new manager differs from that held by the old manager. Instead, the new manager should accept the transferred funds and resolve the discrepancy.

Applying these two rules should mean that managers reject transfers-in only where it’s clear that the wrong ISA was transferred – or the ISA was transferred in error.

Cash to stocks and shares transfers are permitted

Some stocks and shares ISA managers are telling us that they are having problems getting funds transferred from the cash ISA manager. We assume that this is because not all members of the cash ISA manager’s staff are aware of the new rules. Whatever the reason, however, it imposes additional delays on the transfer process. We would appreciate it, therefore, if cash managers remind staff dealing with ISA transfers that cash to stocks and shares transfers are now permitted.

The 30 day rule

There have been a number of recent press articles about the time it is taking for ISA transfers to take place. The ISA transfer time limit – which should be specified in the terms and conditions – relates to the old manager. The ISA regulations make clear that it is the investor who stipulates the timing of the transfer and that the transfer:

'shall be subject to any reasonable business period (not exceeding 30 days) of the account manager required for the practical implementation of the instructions’.

The problems seem to be occurring where the investor approaches the new manager to start the ball rolling but the new manager delays contacting the old manager. We have been told that in some instances the new manager has maintained that the ISA rules allow them 30 days to contact the old manager. This is not correct. There is nothing about this in the regulations. It falls to managers to treat their customers fairly, which is central to the Financial Services Authority (FSA) philosophy, by not causing unacceptable delays which inevitably lead to complaints.

The 30 day rule and ‘cooling off’

If the new manager offers a cooling off period, it would be legitimate for the new manager to temporarily hold on to the investor's transfer out authority before forwarding it to the existing ISA manager. This would allow any cooling off rights in relation to the proposed transfer to expire, eg those the new manager is required to offer under FSA rules. Holding on to the instruction during the cooling off period is a practical way of approaching this. If the instruction is forwarded to the existing manager before the cooling off period has expired it may result in the transfer going ahead before the end of the cooling off period, which would cause problems if the investor then exercised their cooling off rights as under the ISA Regulations as it is not possible to cancel a transfer once a transfer date has been agreed between the two ISA managers.

If managers follow this temporary holding approach in relation to cooling off rights, they should include mention of this in their ISA Terms & Conditions (T&Cs). This will help to manage investors expectations about the speed of the transfer process.

This temporary holding approach will mean that the existing manager receives the investor's transfer out instruction at least a week or more after the investor originally signed the instruction. However, the existing ISA manager will treat the 30 day (maximum) transfer out timescale as starting from the date that they receive the instruction to transfer out, ie not when the investor originally signed the instruction.

Annual Returns of Information - 2009 Magnetic Media Specification now available

The 2009 version of the ISA Magnetic Media Specification has been placed on the website. This version of the Magnetic Media Specification should first be used for the Annual Return of Information for the tax year 2008-09. On no account should the 2009 version be used for the returns about to be made, which relate to the tax year 2007-08.

Annual Returns of Information – form ISACOM100(OCR)

Paragraph 14.16 of the Guidance Notes states that, when completing form ISACOM100(OCR), amounts subscribed and market values should be rounded up to the nearest pound. For example, £999.99 should be reported as £1000. However, the form itself says that amounts should be rounded down. This will be changed to ‘rounded up’ the next time the form is updated.

The form also states that the phone number to be used when ordering further stocks is Tel 01726 201 021. The correct telephone number is 0845 900 0404 and this be shown on the form the next time it is updated.

Qualifying investments – db x-trackers - Sterling Money Market ETF

We have been asked whether this ETF (Exchange Traded Fund) qualifies for cash ISAs or stocks and shares ISAs.

The company has made no guarantee that the investors capital is safe, however, in reality, it is highly unlikely that investors could ever lose money. The factsheet states that 'the ETF performance could be negative if the Sterling Overnight Index Average falls below the level of the All-In fee'. The All-In fee is db x-tracker’s management charge of 0.15 per cent per pa. So an investor would lose money only if the sterling overnight rate were to fall to 0.15 per cent or below (a highly unlikely eventuality).

Our view, therefore, is that investors could be certain (or near certain) of getting back 95 per cent or more of their initial investment. The fund therefore fails the 5 per cent test and is a qualifying investment for cash ISAs, not stocks and shares ISAs.

Qualifying investments – Property Authorised Investment Funds (AIFs)

Property AIFs came into force on 6 April 2008 as a result of amendments to the Authorised Investment Funds (Tax) Regulations 2006. The new regulations permit FSA authorised Open-Ended Investment Companies (OEICs) to opt to be part of the Property AIF regime provided certain conditions are met. In return the fund will be exempt from corporation tax on its property income in a similar way to UK Real Estate Investment Trusts (REITs).

A Property AIF will invest predominantly in property and/or shares in UK REITs. Its total income will therefore consist of:

  • property income (which is required to be ring fenced)
  • other taxable income (primarily interest)
  • UK dividend income

Investors therefore could receive three different types of income:

  • Property Income Distributions (PIDs), which will normally be paid net of basic rate income tax (currently 20 per cent)
  • interest distributions, which will be paid net of income tax at the basic rate (20 per cent)
  • dividend distributions, which will be paid with a tax credit (10 per cent of the gross dividend)

Implications for ISA managers

Property AIFs may qualify for ISA inclusion by virtue of being an FSA authorised fund (please see Guidance Notes, paragraph 7.19). Those that do are permitted under the regulations to make gross payments of PIDs and interest distributions to ISA managers.

However, if the manager operates a mixed or pooled nominee in which there is a mixture of beneficial holders - some entitled to gross interest (because, for example, they are ISA investors) and others not so entitled – the Property AIF will pay both PIDs and interest distributions after deduction of income tax (currently 20 per cent for both types of income) and the manager will have to claim the tax in respect of the ISA investors from SSO on interim claim form ISA10.

Recognised Stock Exchanges – Bond Exchange of South Africa

The Bond Exchange of South Africa (BESA) was designated as a Recognised Stock Exchange (RSE) on 16 April 2008. The list of Recognised Stock Exchanges has been updated accordingly.

However, products traded on the over-the-counter market of BESA will not meet the HMRC definition of ‘listed’ as set out in section 1005 ITA 2007. Managers who are told that a bond is listed on BESA must therefore check that it is not simply traded over-the-counter in order to determine whether it meets the HMRC interpretation of listed on a Recognised Stock Exchange.

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 on Tel 0151 472 6156.