It’s been an interesting week in politics, and some will be pleased at the outcome, but it's not been such a good week for ISAs. Far from it, in fact.
Rachel Reeves decision to stick the tax knife into stocks and shares ISAs has shocked many in the industry.
I’m not sure if she woke up in a bad mood one morning, or read the newspapers suggesting Andy Burnham, seemingly our new and unelected Prime Minister, will soon give her the boot. Perhaps she wanted something to please a new master?
I’d love to know because her decision to scrap the tax free status of stocks and shares ISAs in one fell swoop makes little economic sense even though it may raise a modest amount of tax (to be fair you could tax anything and raise a modest amount of tax).
As I wrote a few weeks back, the extra tax will only damage the simplicity and popularity of ISAs, one of the government’s primary consumer savings vehicles and one used by millions of savers and investors.
Interestingly, as far as I can tell, she has not appeared in public to defend or explain herself but she must explain her rationale.
The only thing I can find to justify the move is that the Treasury wanted to stop people using cash held in ISAs as some kind of dodgy tax avoidance scheme.
ISAs are, in fact, a legitimate tax avoidance product and always have been since 1999 when they were introduced. That's exactly what they were designed to be and a way to encourage saving by removing tax barriers.
So her decision makes no sense and it’s already tying the Treasury in knots trying to work out what is cash, what is a money market fund, what is a cash fund and so on. Good luck with that one.
There are of course so many good and legitimate reasons to hold cash in ISAs.
Most investors add cash and then decide later, after due deliberation and research, where to invest. Some take profits from their investments and then withdraw the money for other purposes, some then ‘phase’ the money back into the markets. I have never heard of people seeing stocks and shares ISAs as way to purely hold large sums of cash to avoid tax - that makes no sense when most ISAs providers offer at best 2% or 3% interest on cash held in ISAs. Easy to beat elsewhere, even with tax on top.
This devastating move will, I suspect, cause chaos and damage both the attractiveness and success of ISAs. It’s no wonder the idea has received almost universal condemnation from the financial services sector and Financial Planners.
It’s worth remembering that 4.1m people hold stocks and shares with over £30bn invested so they are no small beer. At the same time, 9.9m people hold Cash ISAs. Combined, at least 14m people have some kind of ISA - not far off half the working population.
For what it’s worth I think another agenda is emerging and it’s related to wealth tax. I would not be surprised to hear from some politicians calling out ISAs as just a tax perk for the well off. Tell that to the office worker on an average salary who has just used his ISA to help pay off a chunk of his mortgage or save for a holiday or has planned to use it for retirement income.
Let’s hope Mr Burnham moves Ms Reeves on swiftly and nips this stupid idea in the bud as quickly as possible before too much damage is done. He should also look at the equally unwelcome plans to impose inheritance tax on unused pensions. There is still time to stop that one too. Over to you Mr B.
Kevin O’Donnell is editor of Financial Planning Today and a journalist with 40 years of experience in finance, business and mainstream news. This topical comment on the Financial Planning news appears most weeks, usually on Fridays but occasionally other days. Email: