Is your ISA safe from the taxman?

The short answer to this question is no. ISAs are a way of investing, where most of the money will be tax free. However, this largely applies to capital gains tax and income tax, though there is a 10% tax paid on dividend income within an ISA. An ISA is not something that avoids inheritance tax, although new rules would permit the fund to avoid IHT if the holdings are within AIM-listed shares and held for a minimum of 2 years. This can be an option for some people, however for those with a nervous disposition or anything below at least a “medium risk” approach to life, great caution and specific advice should be taken.

Tax avoiders watch out for muscular HMRC

However, today’s news suggests that HMRC are seeking to flex their muscles and raid ISA pots for unpaid tax. The Chancellor already proposed that HMRC could raid your bank account in the last Budget, but it seems this is likely to be extended to raiding your ISA too. This is to collect payment of taxes due to HMRC.

At the last HMRC count, (September 2014) something like £443 billion was held in ISA accounts. ISAs which officially began in the 1999-2000 tax year are due to have a major revamp in July, with the annual allowance increased to £15,000 and the ability to alter your cash holdings within an ISA. This may come as good news to most ISA holders, as still a staggering 80% of the £57 billion subscriptions in 2012-13 were to Cash ISAs, despite interest rates being… well… “poor”. So clearly the majority of people are still not using their ISAs for long-term wealth creation, if they are then they are getting some pretty dreadful advice (based on these numbers).

It may surprise you to learn that over half of people living in the South West have an ISA (53.6%) compared with London (45.4%).

Dominic Thomas: Solomons IFA