ISAs

Why do you need to know?

As an FCA approved deposit taker your credit union may apply to be an ISA manager.

The Key Points

• An ISA is a tax free savings account. ISAs can be used to save cash and the interest will be tax-free or invest in shares or funds in an ISA, any capital growth will be tax, free and there is no further tax to pay on any dividends received.
• Credit unions can only offer cash ISAs. Anyone over the age of 16 can open a cash ISA.
• Credit unions can also offer Junior ISAs, there are separate rules governing these, more information is available in the section below on Junior ISAs

Putting into Practice

Your credit union must apply to the Audit and Pension Schemes Service (APPS) department of HMRC which monitors the ISA scheme to become an ISA manager.

There are two types of ISA; stocks and shares ISAs and cash ISAs. Your members can invest in one of each type in each tax year. The amount that can be invested is subject to the following limits:

• No more than £11,280 per year in total.
• No more than £5,640 per year in a cash ISA. The remainder of the £11,280 can then be invested in a stocks and shares ISA, e.g. if £2,000 is invested in a cash ISA in a tax year, the remaining £9,280 can be invested in a stocks and shares ISA.

The cash ISA and stocks and shares ISA can be with either the same or with different providers but your credit union will only be able to offer the cash ISA.

You cannot accept a transfer in of any other ISA, as only cash ISA can be transferred into another cash ISA.

Any members aged 16 or over who are a UK resident can open an ISA. Only one ISA can be opened in each tax year (starting April 6). An ISA does not have to be closed if a person ceases to be resident in the United Kingdom but no further subscriptions can be made until residency is resumed.

An ISA cannot be opened in joint names and cannot be opened on behalf of another person except by a Guardian of Power of Attorney in the case of mental incapacity.

Reporting Requirements

There are 3 types of return to be made to the SPS (Savings and Pensions Schemes – department of HMRC which operates the ISA scheme) each year:

1. Annual Return and Claim

This form is mainly designed for reclaiming tax on investments which does not apply to cash ISAs. However, you will still have to submit this return, although there will be no tax to reclaim. The return must be submitted by October 5 following the end of the tax year on form ISA14.

http://www.hmrc.gov.uk/isa/isa14-2006.pdf

2.   Annual Return of Information

This return is made on form ISACOM100(Z) and can also be submitted on magnetic media available at:

ISA Form

The return must be made by June 4 and contains details of all ISAs, including those closed and transferred in during the tax year

3.   Annual Return of Statistical Information

This simply details all of the cash and deposits held which are attributable to ISAs, as no investment information will be relevant. The return must be made by June 4 on form ISA14(Stats).

http://www.hmrc.gov.uk/isa/isa14-stats.pdf

Failure to make these returns or submission of incorrect returns will incur penalties under Section 98 of the Taxes Management Act 1970.

Auditing

Auditing is carried out by the APSS Audit Unit which carries out random inspections at the ISA managers’ premises. There will always be at least 14 days’ notice of an inspection and the manager will be issued in advance with a copy of the APSS’ Code of Practice 4, which details how the inspection should be conducted. Findings from the inspection will be reported back to the manager within 28 days.

Members applying for a cash ISA

Members who want to open an ISA must apply using an application form which must include details specified in the Guidance Notes 2011 at: http://www.hmrc.gov.uk/isa/isa-guidance-notes.pdf which are:

“I declare that:

• All subscriptions made, and to be made, belong to me.
• I am 16 years of age or over.
• I have not subscribed, and will not subscribe, more than £11,280 in total to a cash ISA and a stocks and shares ISA in the same tax year.
• I have not subscribed, and will not subscribe, more than £5,640 of the overall £11,280 total to a cash ISA.
• I have not subscribed, and will not subscribe, to another cash ISA in the same tax year that I subscribe to this cash ISA, and I am resident and ordinarily resident in the United Kingdom for tax purposes or, if not so resident, either perform duties which, by virtue of Section 28 of Income Tax (Earnings & Pensions) Act 2003 (Crown employees serving overseas), are treated as being performed in the United Kingdom, or I am married to, or in a civil partnership with, a person who performs such duties.
• I will inform [name of Credit Union] if I cease to be so resident and ordinarily resident or to perform such duties or be married to, or in a civil partnership with, a person who performs such duties.”

Declarations must also contain:

• a declaration that the information given is correct to the best of the member’s knowledge and belief;
• an agreement by the member to the ISA terms and conditions; and
• the member’s signature.

A specimen application form is contained in paragraph 4.39 of the HRMC guidance and may be personalised for your credit union, as long as all relevant data are collected.

ISAs in detail

The ISA scheme provides different ways of saving to meet your member’s different needs. With an ISA they can plan for the short term, or put your money away for much longer.

What can a cash ISA include?

Your members can pay funds from any of the following into a cash ISA:

• cash deposited in bank and building society accounts;
• National Savings and Investments products that are specially designed for ISAs (but not other National Savings and Investments products such as the Investment Account, Savings Certificates or Pensioners’ Guaranteed Income Bonds);
• alternative Finance arrangements, such as Shari’a compliant products;
• shares in companies and collective investment schemes that fail to meet the qualifying conditions for stocks and shares ISAs;
• life insurance policies that fail to meet the qualifying conditions for the stocks and shares ISAs;
• the stakeholder cash product; and 
• stakeholder medium-term products that fail to meet the qualifying conditions for stocks and shares ISAs.

Transfers

It is possible to transfer a cash ISA to another ISA manager, either into another cash ISA or into stocks and shares ISA.

It is possible to transfer some or all of the money saved in previous tax years without affecting the annual ISA investment allowance.

Security

An ISA cannot be used as security for a personal loan. However, the right to set off can be applied through the judicial process in cases where there is default on a loan.

Withdrawals

Withdrawals can be made from the ISA without affecting the tax exemption. The ISA can also be closed at any time without tax penalty.

However, some ISAs may run for a fixed period or require notice of withdrawal and the member may lose some interest or a bonus if they withdraw early. In some cases, there may also be a penalty if the member surrenders an ISA life insurance policy early.

If a member takes money out, any that is put back later will count against the ISA annual subscription limit in the ISA year.

Interest

Your credit union sets the rate of interest on the ISA, subject to the limits imposed on credit unions. Tax does not have to be deducted at source from the interest paid.

Death of an investor

Interest payable to the date of death is exempt from tax. However, any interest earned after the date of death is taxable and you must pay any such tax liability direct to the SPS before paying the funds to the legal beneficiary of the deceased person’s estate.

Information to Members

Your credit union must issue annual notices to members, reminding them of the ISA rules, to avoid any breach of the subscription limits. Such notices should be issued between January 6 and May 5 of each year.

Breaches of Limits

If the subscription limits are breached, either by the investor or manager, advice should be sought from the SPS. The ISA may be “repairable” by moving some of the cash into an ordinary deposit account but this should only be done under a “notice of discovery” from the SPS Compliance Unit. If the ISA is not repairable it must be voided. Details of these processes are contained in Chapter 12 of the Guidance.

Further Information

Information for ISA managers available at:  http://www.hmrc.gov.uk/isa/isa-guidance-notes.pdf

For information and free marketing materials for Scottish Friendly Assurance CTF and Stocks & Shares ISA, contact ABCUL Membership Services on 0161 832 3694 or email info@abcul.org