Policy paper

Individual Savings Accounts: increasing flexibility for savers

Updated 17 February 2016

Who is likely to be affected?

• Individual Savings Account (ISA) savers
• savers who have used a Help to Buy: ISA to save for a deposit on their first home
• banks, building societies and other financial institutions that offer ISAs

General description of the measure

This measure will increase the flexibility available within ISA by allowing savers to:

• replace cash they have withdrawn from their ISA earlier in a year
• reinvest savings they withdrew from a Help to Buy: ISA if an intended house purchase does not proceed

without these payments counting towards the annual ISA subscription limit.

Policy objective

To increase the flexibility of ISAs for savers, and support those saving for a deposit on their first home in a Help to Buy: ISA.

Background to the measure

Increased flexibility in relation to withdrawal and replacement of cash from an ISA was announced at March Budget 2015. The 6 April 2016 commencement date for this change was announced at Summer Budget 2015. A technical consultation on draft legislation took place between 13 October and 8 November 2015.

The Help to Buy: ISA scheme was announced at March Budget 2015 and the account has been available to savers since 1 December 2015. Under the scheme rules, the earliest that a saver could earn a Help to Buy: ISA bonus on their savings is 1 February 2016.

Detailed proposal

Operative date

The measure will have effect on and after 1 February 2016, except for those changes which allow savers to replace cash they have withdrawn from their ISA earlier in a year, which will have effect on and after 6 April 2016.

Current law

The account rules which apply to ISA are set out in the Individual Savings Account Regulations 1998 (SI 1870/1998) (ISA Regulations). These rules limit the amount which can be subscribed to an ISA in a given tax year, but also set out circumstances in which payments to an account can be disregarded for the purposes of this limit.

The effect of the current rules is that a saver is only able to save a maximum of the annual limit (currently £15,240) in ISA each tax year. Where a saver withdraws cash from their ISA and subsequently replaces all, or some, of that cash, the replacement counts as a new subscription for the purposes of the annual limit. In addition, other than in specified circumstances, a saver may not subscribe to more than one cash ISA and one stocks and shares ISA each year.

Proposed revisions

The ISA Regulations will be amended by secondary legislation to establish new flexibility that will allow savers to replace cash they have withdrawn from their account earlier in a tax year, without this replacement counting towards the annual ISA subscription limit. This flexibility will be available in relation to both current year and earlier year ISA savings where provided for in the terms and conditions of a ‘flexible ISA’, but will be subject to conditions in certain cases about which ISA provider can accept replacement amounts. ISA providers can offer this flexibility for cash ISAs and also for cash that is held in stocks and shares ISAs.

Further changes will be made to the ISA Regulations for cases in which a saver has closed their Help to Buy: ISA and withdrawn their savings, but their intended home purchase does not proceed. Subject to certain conditions, they will be able to replace their savings in an ISA (including a Help to Buy: ISA) without this counting towards the annual ISA subscription limit.

In certain circumstances where a saver makes a payment that does not count towards the ISA subscription limit, it will also be possible for them to subscribe to more than one cash and one stocks and shares ISA in a year.

Consequential and other revisions will also be made to the ISA Regulations in respect of these changes and other ISA payments that are currently disregarded for the purposes of the annual subscription limit. This includes the rules on the information that an account provider must obtain or supply when they open or transfer an account. HMRC’s reporting requirements for ISA providers will also be updated.

Summary of impacts

Exchequer impact (£m)	2015 to 2016	2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020
	-15	-1030	-565	-640	-765
	These figures are set out in Table 2.1 of Budget 2015 as 'Savings tax: allowance and ISA flexibility,' and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2015.
Economic impact	The measure is not expected to have any significant economic impacts.
Impact on individuals, households and families	This measure will increase the flexibility available to ISA savers. No individual will face additional tax costs as a result of this change, which will benefit savers who wish to access and replace their ISA savings in the same year and Help to Buy: ISA savers whose intended house purchase does not proceed. The measure is not expected to affect family formation, stability or breakdown.
Equalities impacts	No evidence on ISA holdings by individuals with protected characteristics is available, although it is not anticipated that the measure will particularly impact on groups sharing protected characteristics.
Impact on business including civil society organisations	The changes could affect around 400 banks, building societies and other financial institutions that offer ISAs.They will make ISA more flexible and attractive for some savers, and may therefore increase ISA business for some account providers. However, offering account flexibility will impose development costs for ISA providers. This includes costs associated with changes to the systems which providers currently use to apply and police the ISA subscription limit. Further alterations will be required to accommodate a change to the way in which the total amount subscribed to an ISA in a year is reported to HMRC. In addition, many providers will need to update their ISA publicity materials and familiarise customer-facing staff with these changes. After these initial implementation and set-up expenses, ongoing costs for ISA providers are likely to be limited to those associated with processing additional subscriptions and withdrawals that take place following these changes, and reporting to HMRC. While the costs set out in this assessment will mainly fall on providers who choose to offer this flexibility, there could also be some impact on other ISA providers, for example when an account is transferred to them. The costs to ISA providers in relation to the Help to Buy: ISA changes are expected to be limited to those associated with opening (or reopening) a relatively small number of accounts each year, and processing subsequent transactions. Overall the costs on businesses are expected to be negligible.
Operational impact (£m) HMRC or other)	There will be no significant impact for HMRC.
Other impacts	Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be kept under review through communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact Simon Turner on Telephone: 03000 546588 or email: savings.audit@hmrc.gsi.gov.uk.

Declaration

David Gauke MP, Financial Secretary to the Treasury, has read this Tax Information and Impact Note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.