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Why it Pays to be Flexible this ISA Season

By Proplend – 01/03/2019

Flexible ISA Options

While 5 April has long been the date to ‘use or lose’ your annual ISA allowance, this date now has the added significance of being the deadline for flexible ISA holders to ‘replace’ any funds withdrawn during the current tax year.

Article Summary

Now incorporated by a majority of providers, Flexible ISA rules introduced in 2016-17 offer UK taxpaying residents (and crown employees) increased ISA access and control. For those of us a little stuck in our ISA ways, the concepts of temporary ‘replaceable’ withdrawals and net subscriptions might take a bit of getting used to, but it can really pay to understand them.

Whether you think you could benefit immediately from the flexibility or it helps keep your options open for a future change of circumstances (or heart), the new rules give effectively give you access to your entire flexible ISA if and when you need it – whether temporarily or permanently.

Thanks to flexible ISAs, £8,000 subscribed minus £3,000 withdrawn does now indeed make a net subscription of £5,000, with a remaining ISA allowance (based on 2018-19 limits) of £15,000. Until relatively recently you would have been told the amount subscribed in these circumstances was still £8,000, and rather unfairly we think, that you only in fact had £12,000 of your allowance remaining.

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While flexible ISAs are a little more involved from a provider’s perspective, we believe they needn’t be overly complicated from an investor’s perspective. We were delighted to be able to bring the benefits of this flexibility to our Lenders from launch of our Innovative ISA almost two years ago and this year we’ve enhanced our ISA dashboard to help you monitor your allowances and withdrawals.

As ISA Managers, we can only ever be aware of what’s happening in our ISA. So naturally, it falls on the individual to ensure that they stay within the annual allowance, taking all their ISAs into account. It falls on us however to make it clear to them what their running totals with us are and what they can replace within our ISA by 5 April.

 

Net subscriptions to flexible ISAs

At the end of each tax year, every ISA Manager is asked to report what each of the ISA holders has subscribed for the year. As our IFISA is flexible, we can report the net subscription – subscriptions in minus withdrawn subscriptions. We will be display this figure prominently on ISA dashboards within the next few days.

Like any provider, if you subscribe £20,000 to us in 2018-19, we assume that you have not subscribed anywhere else this tax year. We will cap your subscriptions to our ISA at the overall annual limit, but if you’re subscribing to other ISA types (you can only subscribe to one ISA of each type), you should be adjusting your maximum subscription to us accordingly.

Remember, even with flexible ISAs, providers can’t accept subscriptions that would take you over the annual limit, even temporarily. We may show you that you’ve used £14,000 of your overall £20,000 limit with us, but this isn’t to say that you have scope to pay the remaining £6,000 to us – only you will know your remaining scope (if any) to further subscribe before the end of the year.

 

Replaceable balances for a specific ISA

Where we can be a more definitive, is the balance we tell individuals they can replace to our ISA only. Whilst current year subscriptions withdrawn from a flexible ISA can be re-subscribed to us or placed elsewhere, the previous year ISA funds withdrawn from a flexible ISA can only be replaced to the same ISA they were withdrawn from – and only then if received back by 5 April.

When you withdraw funds from a flexible ISA, you’re under no obligation to return all of the total withdrawn, so the flexibility of having the option to replace some, all or none of these withdrawals as circumstances change, is a significant benefit. And your Proplend ISA dashboard will soon tell you exactly how much you can replace on a real time basis.

It normally makes sense to return as much as you can to maximise the amount you hold in a tax-privileged environment. Adding as much as you can back in before the deadline means that this larger balance can potentially benefit from tax-free treatment next year, even if you can’t afford to keep this whole amount in the ISA for the whole tax year.

HMRC rules dictate whether we treat withdrawals as subscriptions or being from the previous year pot – you don’t need to specify how these funds should be earmarked. Withdrawals will always have the effect of reducing net (current year) subscriptions in the first instance, before they’re considered to come from the previous year funds. In this way, the ISA holder has more choice where to place any funds they choose to recommit.

 

A worked example – regular interest withdrawals

As well as withdrawing funds on an ad hoc basis, Proplend offers the option of having loan interest ‘swept’ at the beginning of each month to your nominated bank account. If you have made subscriptions to the ISA during this tax year, you will see the net subscriptions figure on your dashboard reduce by the interest amount – meaning this extra amount can be re-subscribed to us or another ISA Manager.

If no subscriptions have been made to date, you’ll see the replaceable balance increase on your dashboard by the amount of the withdrawn interest – as this is coming from (retained) previous year funds, it can only be replaced to our ISA. Depending on the size of your withdrawal, you could even see both figures change as after subscriptions have been refunded, the remainder is taken from previous year funds.

We’ll be writing out shortly to all ISA Lenders pointing them in the direction of these two new dashboard fields, to help them maximise the use of their allowance and flexibility.

New flexible balances on ISA dashboard

In this example, the Lender has no withdrawals of previous year funds that could be replaced during this tax year. They have just over £1,000 of their current annual allowance that hasn’t been subscribed to us.

 

ISA flexibility not to be confused with ISA transfer ‘freedom’

You have the right to request the transfer of funds held in existing ISAs of any type to a new or existing ISAs of the same or any other type. ISA transfers give us all an alternative way of funding ISAs or rebalancing portfolios that isn’t limited by how much annual allowance or disposable income we have available.

If your existing ISA isn’t flexible, then you have the option of transferring funds to one (or more) that is to give you more access to those existing ISA funds. If you use transfers to consolidate your pots to a flexible ISA, this could give you access to a significant sum made up of many years ISA subscriptions. And flexibility doesn’t mean lower returns – moving ISA pots to maximise returns is the other main reason for transferring to a flexible innovative finance ISA.

With ISA transfers, funds are moved directly between ISA Managers, retaining their ISA status throughout. ISA flexibility meanwhile, relates to the option of temporarily withdrawing funds yourself and personally removing them from their tax wrapper. While outside of the ISA, returns on these funds are taxable, albeit the replaceable amount can be reintegrated into the ISA before the end of the tax year as if the funds had never been removed.

But the distinction is particularly important when moving current year subscriptions. You could potentially withdraw all current year subscriptions in an ISA and re-subscribe them to another ISA type, but you would breach the one per type subscription rule if you personally placed them with another ISA of the same type. If you transfer current year subscriptions from an ISA, you will have to transfer all of those subscriptions together, but you can legitimately have them moved to another provider of the same type.

So, when it comes to redistributing your ISA funds, ISA transfers still give you more options than using the ISA flexibility for this purpose and are worth considering in the first instance. And while some Managers restrict partial transfers or charge transfer fees, Proplend’s IFISA permits full and partial transfers in and out, with no additional charges.

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Similar to the freedom to transfer ISA pots, the benefits of ISA flexibility seems unfortunately to remain a relatively well-kept secret – despite awareness of these valuable options being in the public interest.

Providing additional choice and control, ISA transfers help ISA holders reallocate their existing pots to maximise immediate returns, as well as enabling them to quickly rebalance the overall risk-return profile of their portfolio. ISA flexibility gives short term access to entire flexible pots without necessarily diminishing the future tax-free earning potential of your ISA-earmarked funds.