(retitled) (Re:) Future CGT status of ISAs

[IanSmithISA]

Good morning,

Don't be too sure on the CGT status in the future especially for an ISA.

I have a Share Dealing ISA and I am drifting towards the view that those with serious capital gains might want to give serious consideration to closing it. The reason is entirely political, while Keir Starmer doesn't appear to be a radical politician, both he and Boris Jonhson are going to be facing some very serious budgetary issues over the next 5-10 years.

The impact of COVID 19 on borrowing is starting to become clear, currently estimated at around £300 billion plus and growing. Since 2009 the UK National Debt has grown from around 40% of GDP to 100% by May 2020, in money terms the UK now owes over 2.3 thousand billion pounds, 2,300,000,000,000. This is roughly £65k per tax payer. Again this is probably a bit higher this month. I do appreciate that a large proportion of this was funded by QE and the government could actually simply say it is no longer due, the implications of doing this are unknown.

This is only the direct cost, we are now pretty much seeing businesses contract massively on a daily basis and many of these contractions will not be easily reversible.

At some point and who knows when, the market is going to stop lending to HMG on the grounds that not only is their capital at risk but so are the interest payments.

So a tax grab before we get that point seems possible, even possible, but by no means certain and I suspect that a Labour government might find it easier than a Conservative one.

With a need to raise tax I could see something like.

Stop New Contributions.
In this case no new funds would be allowed to be added to the ISA but funds currently within the ISA would continue to be CGT/Income tax free. Stopping new contributions is something very easy to sell politically and wouldn't be too harmful.

Moderator Message:
While interesting, this is thoroughly off-topic. As the answer sought has been provided, the topic will be closed. -- MDW1954

Whilst it is not clear how many people hold Share ISAs it does seem reasonable to believe that it is a quite small percentage of the population. I suspect that many non holders regard them, or would regard them if they knew they existed, as another tax break for the rich.

ISAs simply cease to exist.
This seems a possible route, the whole ISA concept disappears overnight and the shares are moved back into a normal share dealing account with CGT due at sale time. I can see legal challenges if this were to be done, but also the government winning as they are simply withdrawing a tax allowance.

If you accept this then imagine the position that starting from the Tax Year 2022-2023 Share ISAs cease to exist and at Aug 2022 your holdings are

Company Old - Bought Jan 2014
Company Medium - Bought Jan 2022
Company New - Bought July 2022

and that you wish to sell everything.

Clearly Company New will be subject to CGT, Company Medium and Company Old might or might not be. Only when the law to remove ISAs is created will we know if CGT is to be applied to shares already within an ISA when the ISA ceases to exist.

In the case of Company Medium it may not matter too much, depending upon your circumstances and strategy as the CGT amount would probably be quite small.

In the case of Company Old and the law becoming the sale is subject to CGT then you have over eight years of capital growth, that could be ouch!

It seems likely that moving Company Old out of the ISA now is likely to escape the possible CGT liability, but at the risk of losing the ISAs advantages going forward.

Bye

Ian

Moderator Message:
another Mod has shunted a copy of this post here for Tax debate. I have retitled it. regards, dspp

[Gengulphus]

Don't be too sure on the CGT status in the future especially for an ISA.

I have a Share Dealing ISA and I am drifting towards the view that those with serious capital gains might want to give serious consideration to closing it. ...
With a need to raise tax I could see something like.

Stop New Contributions.
In this case no new funds would be allowed to be added to the ISA but funds currently within the ISA would continue to be CGT/Income tax free. Stopping new contributions is something very easy to sell politically and wouldn't be too harmful.
...
ISAs simply cease to exist.
This seems a possible route, the whole ISA concept disappears overnight and the shares are moved back into a normal share dealing account with CGT due at sale time. I can see legal challenges if this were to be done, but also the government winning as they are simply withdrawing a tax allowance.

I agree that a need to raise tax might cause the Chancellor to make ISAs cease to exist. How likely that is is an interesting question, but I won't discuss it on this "practical issues" board. But on the practicalities for the Chancellor to actually do that, the line of least resistance for him for stocks & shares ISAs seems to me to be just to declare shares no longer an eligible investment for ISAs and let the existing rules about no-longer-eligible shares in ISAs take effect: the ISA manager must ensure that the investor sells the shares or withdraws them from the ISA into personal ownership within 30 days, failing which the ISA manager will transfer them to personal ownership by the investor. If they pass to the personal ownership of the investor in either of those two ways, the ISA manager tells the investor their market value on the day of withdrawal/transfer, and the investor uses that value as the CGT base cost for the holding.

If it's done that way, it makes no sense to pre-empt the change by withdrawing the shares now - one might as well continue getting the ISA tax benefits for as long as possible. And I think it highly likely that if ISAs do cease to exist, it will be done that way: it's a very simple change to the ISA rules, it's easy to argue that it's a simple withdrawal of a tax benefit, it doesn't invite all sorts of 'retrospective taxation' arguments against it, and it doesn't produce horrendous problems for long-term ISA shareholdings whose past history taxpayers haven't kept records of because they weren't relevant for tax purposes. And at least at the moment, there are probably lots of ISA shareholdings that were bought before the pandemic started but within the last few years, and so are standing on an unrealised loss - so bringing past unrealised gains and losses within ISAs into account for CGT might well not be particularly lucrative. (Yes, I know that there are 'ISA millionaires' whose ISAs must be worth considerably more than the total subscriptions made to them - but the difference between their current value and those total subscriptions is an unknown mix of already-realised and still-unrealised gains, with the proportion of the latter probably quite a lot lower than it was at the start of this year, and taxing the already-realised gains is even more problematic with regard to retrospective taxation and whether records have been kept.)

But suppose you think I'm wrong about that, i.e. that there is a significant risk that the Chancellor decides not only to remove shares from ISAs but also to subject each removed shareholding to CGT according to the entire history of the holding rather than just according to its history from when it's removed onwards, and suppose also that you want to safeguard yourself against that. If that's the case, closing the ISA still doesn't look like the best way to do that safeguarding. Why not? Because rather than closing it and losing its tax benefits, you can protect it against any such move by the Chancellor by driving its net unrealised gains down, or even booby-trap it against such a move by driving it down to having net unrealised losses. Basically, you do that by selling holdings within the ISA that are standing on significant unrealised gains, taking whatever CGT-planning measures you would use if the holdings were unsheltered. E.g. if you and your spouse both have ISAs holding shares, choose holdings standing on significant unrealised gains within each ISA and with similar total values (avoiding choosing the same share in both - but note that you can repeat the exercise 31 or more days later on holdings omitted from the first exercise for this reason), then you each sell your chosen holdings and use the proceeds to buy the other's chosen holdings. Or if you don't have a spouse (or your spouse doesn't have a suitable ISA) but do have a SIPP, do something similar between your ISA and your SIPP. Or possibly sell holdings that are standing on significant outstanding gains and use the proceeds to buy shares in companies with similar prospects, possibly switching back at least 31 days later if you think the new shares aren't quite as good (by enough to justify the extra set of trading costs). Or sell such holdings, and also holdings from an unsheltered account of a similar total value (chosen to have beneficial effects on your CGT position this year), and use the proceeds to buy the former ISA holdings outside the ISA and the former unsheltered holdings inside the ISA. Or sell such holdings and simply hold the proceeds as cash until you repurchase them at least 31 days later. And there are doubtless other methods of achieving similar results that I haven't thought of offhand...

All of those measures have associated trading costs, and some expose you to share price movements for 31 days (which is not necessarily bad, just a bit of a gamble). But those costs, and any statistically-expected loss from the gamble, are basically a fairly small insurance premium to avoid closing the ISA and losing the ISA tax benefits until ISAs cease to exist, or for the rest of your life if ISAs last that long.

Just to be clear, I'm not recommending paying that insurance premium: I think the risk that the Chancellor will cause ISAs to cease to exist in any way that doesn't cause the shareholdings to emerge with base costs equal to their market value at the time is too small to justify paying it. But for those who think otherwise, I think driving the unrealised gains in the ISA down and accepting that doing so will have some trading costs is a better countermeasure for that risk than closing the ISA.

Gengulphus

[dspp]

Don't be too sure on the CGT status in the future especially for an ISA.

Don't be too sure on the CGT status in the future especially for an ISA.

I have a Share Dealing ISA and I am drifting towards the view that those with serious capital gains might want to give serious consideration to closing it. ...
With a need to raise tax I could see something like.

Stop New Contributions.
In this case no new funds would be allowed to be added to the ISA but funds currently within the ISA would continue to be CGT/Income tax free. Stopping new contributions is something very easy to sell politically and wouldn't be too harmful.
...
ISAs simply cease to exist.
This seems a possible route, the whole ISA concept disappears overnight and the shares are moved back into a normal share dealing account with CGT due at sale time. I can see legal challenges if this were to be done, but also the government winning as they are simply withdrawing a tax allowance.

I agree that a need to raise tax might cause the Chancellor to make ISAs cease to exist. How likely that is is an interesting question, but I won't discuss it on this "practical issues" board. But on the practicalities for the Chancellor to actually do that, the line of least resistance for him for stocks & shares ISAs seems to me to be just to declare shares no longer an eligible investment for ISAs and let the existing rules about no-longer-eligible shares in ISAs take effect: the ISA manager must ensure that the investor sells the shares or withdraws them from the ISA into personal ownership within 30 days, failing which the ISA manager will transfer them to personal ownership by the investor. If they pass to the personal ownership of the investor in either of those two ways, the ISA manager tells the investor their market value on the day of withdrawal/transfer, and the investor uses that value as the CGT base cost for the holding.

If it's done that way, it makes no sense to pre-empt the change by withdrawing the shares now - one might as well continue getting the ISA tax benefits for as long as possible. And I think it highly likely that if ISAs do cease to exist, it will be done that way: it's a very simple change to the ISA rules, it's easy to argue that it's a simple withdrawal of a tax benefit, it doesn't invite all sorts of 'retrospective taxation' arguments against it, and it doesn't produce horrendous problems for long-term ISA shareholdings whose past history taxpayers haven't kept records of because they weren't relevant for tax purposes. And at least at the moment, there are probably lots of ISA shareholdings that were bought before the pandemic started but within the last few years, and so are standing on an unrealised loss - so bringing past unrealised gains and losses within ISAs into account for CGT might well not be particularly lucrative. (Yes, I know that there are 'ISA millionaires' whose ISAs must be worth considerably more than the total subscriptions made to them - but the difference between their current value and those total subscriptions is an unknown mix of already-realised and still-unrealised gains, with the proportion of the latter probably quite a lot lower than it was at the start of this year, and taxing the already-realised gains is even more problematic with regard to retrospective taxation and whether records have been kept.)

But suppose you think I'm wrong about that, i.e. that there is a significant risk that the Chancellor decides not only to remove shares from ISAs but also to subject each removed shareholding to CGT according to the entire history of the holding rather than just according to its history from when it's removed onwards, and suppose also that you want to safeguard yourself against that. If that's the case, closing the ISA still doesn't look like the best way to do that safeguarding. Why not? Because rather than closing it and losing its tax benefits, you can protect it against any such move by the Chancellor by driving its net unrealised gains down, or even booby-trap it against such a move by driving it down to having net unrealised losses. Basically, you do that by selling holdings within the ISA that are standing on significant unrealised gains, taking whatever CGT-planning measures you would use if the holdings were unsheltered. E.g. if you and your spouse both have ISAs holding shares, choose holdings standing on significant unrealised gains within each ISA and with similar total values (avoiding choosing the same share in both - but note that you can repeat the exercise 31 or more days later on holdings omitted from the first exercise for this reason), then you each sell your chosen holdings and use the proceeds to buy the other's chosen holdings. Or if you don't have a spouse (or your spouse doesn't have a suitable ISA) but do have a SIPP, do something similar between your ISA and your SIPP. Or possibly sell holdings that are standing on significant outstanding gains and use the proceeds to buy shares in companies with similar prospects, possibly switching back at least 31 days later if you think the new shares aren't quite as good (by enough to justify the extra set of trading costs). Or sell such holdings, and also holdings from an unsheltered account of a similar total value (chosen to have beneficial effects on your CGT position this year), and use the proceeds to buy the former ISA holdings outside the ISA and the former unsheltered holdings inside the ISA. Or sell such holdings and simply hold the proceeds as cash until you repurchase them at least 31 days later. And there are doubtless other methods of achieving similar results that I haven't thought of offhand...

All of those measures have associated trading costs, and some expose you to share price movements for 31 days (which is not necessarily bad, just a bit of a gamble). But those costs, and any statistically-expected loss from the gamble, are basically a fairly small insurance premium to avoid closing the ISA and losing the ISA tax benefits until ISAs cease to exist, or for the rest of your life if ISAs last that long.

Just to be clear, I'm not recommending paying that insurance premium: I think the risk that the Chancellor will cause ISAs to cease to exist in any way that doesn't cause the shareholdings to emerge with base costs equal to their market value at the time is too small to justify paying it. But for those who think otherwise, I think driving the unrealised gains in the ISA down and accepting that doing so will have some trading costs is a better countermeasure for that risk than closing the ISA.

Gengulphus

It occurs to me that the Cons might come at this a different way.

We can all see that funds are leaving the UK (excuse definitional ambiguity), and indeed many of us admit to downselecting UK in our stock/bond exposures. We can also see that raising taxes is likely to be on the agenda, making minimising tax havens an issue. And passporting is gone with equivalence derecognition looming.

What better opportunity therefore to declare that henceforth patriotic Brits will be forced to invest in FTSE listed stocks if they are to benefit from ISA/SIPP protection. How patriotic, forced bondage on yet another front via Brexit.

Of course in such a scheme mutuals (funds etc) can simultaneously qualify whilst giving out-of-UK exposure. Giving the nasty Moggies of this world a forced market to be bled, whilst restricting Irish-based loco index trackers that take all the lovely fees away from the nice chaps/esses in the City.

Not that I have heard any of this murmured anywhere of course .....

regards, dspp

[Gengulphus]

It occurs to me that the Cons might come at this a different way.

We can all see that funds are leaving the UK (excuse definitional ambiguity), and indeed many of us admit to downselecting UK in our stock/bond exposures. We can also see that raising taxes is likely to be on the agenda, making minimising tax havens an issue. And passporting is gone with equivalence derecognition looming.

What better opportunity therefore to declare that henceforth patriotic Brits will be forced to invest in FTSE listed stocks if they are to benefit from ISA/SIPP protection. How patriotic, forced bondage on yet another front via Brexit.

And easily implemented in practice by changing the rules about ISA-eligibility to include only those stocks and (probably) funds that are at least N% invested in such stocks, for some high value of N% such as 90% - once that's done, just leave it to ISA managers and ISA holders to sort out what happens to the now-ineligible holdings according to the current rules. And also to make them, and managers of funds intended for the UK market, keener to vote down attempts by companies to move abroad...

A cunning plan - and like all such cunning plans, subject to the law of unintended consequences. In particular, it seems entirely foreseeable to me that various foreign governments would respond with suitable tax measures to favour their own companies over UK companies, but I don't particularly expect our politicians (from any party) to manage to foresee it...

Gengulphus