ISAs
ISA stands for Individual Savings Account, a tax-efficient savings tool, with a maximum limit on how much a customer can put in each year.
The account rules for ISAs are set out in the Individual Savings Account Regulations 1998, which specify:
- which investments qualify for these accounts
- which financial institutions can offer which ISAs
- the rules concerning ownership, transfer and withdrawal of ISA investments
- the information that ISA providers must supply to HMRC.
Types of complaint we see
In many of the complaints we see involving ISAs, a customer has tried to:
- make an investment or deposit cash towards the end of a tax year
- top up their ISA during the tax year
but the financial business:
- was unable to carry out their instructions in time
- did something wrong
- failed to do something
As a result, the customer couldn’t use their ISA allowance (or part of it) for that tax year and was disadvantaged.
Other examples of complaints we see might involve:
- a customer losing the tax-free status of their cash-ISA savings when moving money to a different provider's cash ISA
- a bank imposing a penalty fee when a customer transfers the proceeds of a cash ISA to a different provider's ISA
- a customer missing their annual ISA allowance because of a business error
- a bank not following transfer instructions and the customer losing out investment growth opportunity
- an ISA not suiting the customer’s attitude to risk
- delays transferring the account to another ISA manager
What we look at
This depends on the type of ISA and the customer’s circumstances. We’ll listen to both sides of the story and investigate the facts before making a decision.
Find out more about what we consider when looking at complaints about different kinds of ISAs:
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Customers who hold cash in an ISA don’t have to pay tax on the interest. So if a contribution is missed, the potential loss is the tax they’ll have to pay on that interest outside the ISA.
We’ll usually calculate the losses a customer has incurred by missing an opportunity to pay into in a cash ISA by comparing the net interest rate earned by the funds outside the ISA, with the gross rate achievable inside the ISA.
We generally take the view that losses through missing a cash ISA allowance will be for no more than five years. This reflects the fact that cash holdings are normally used to meet expenses first, rather than cashing in investments. But we’ll always look at the individual financial circumstances of the customer when deciding.
We also usually assume that during those five years:
- the customer's tax status would not change
- ISAs would remain available with the same benefits
- it would be reasonable to expect a savings rate of 2.5% gross
A customer may sometimes limit their loss by investing in a cash ISA during a later tax year, using money they wouldn’t otherwise have used for this purpose. If it seems likely that the customer would be able to replace the missed ISA in this way within five years, we’ll take this into account when working out any compensation.
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If a customer has missed an opportunity to use their stocks and shares ISA allowance, we’ll usually start by assuming the customer would have invested the same amount in the same fund at the same price.
We’ll then calculate how much they’d lose out by not holding that investment within an ISA. This depends on:
- how quickly the missed ISA can be replaced
- the customer's tax status
- how that investment is liable for tax
- how quickly the missed ISA can be replaced
Customers who miss out on using their allowance in a particular tax year can often put this right in a later tax year. When we look at how long it’ll be before a customer can make good on a lost opportunity to invest in an ISA, we’ll consider whether they:
- had consistently used their ISA allowance in previous tax years
- have savings, investments or surplus income to put into an ISA in future tax years
Find out more about handling complaints about stocks and shares.
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In these cases, we can look at complaints about ISA managers but we can’t look at complaints about the scheme administrator or the conveyancer.
If the customer says they were misinformed, we’ll need to look at how clear the ISA manager was in their instructions. In some cases, customers told us they wouldn’t have put their money into an account had they been informed correctly, and as a result lost out on other investment opportunities.
Sometimes a customer complains about feeling misled about the government bonus being used towards their initial deposit (normally paid when contracts are exchanged, also called the exchange deposit) but the bonus is only available at completion.Some customers say they experienced a shortfall on their exchange deposit because they were relying on the bonus for their down payment. Some are unhappy because it’ll take longer to save for their exchange deposit.
In these situations, we’ll check that your ISA literature and advertising was clear about the bonus being paid on completion and not as part of the exchange deposit.
Information about when the bonus would be payable is usually available to ISA managers before the scheme started.
In some cases, customers say you didn’t provide correct information about when the bonus would be payable and we agree, but the customer hasn’t started looking for a house to buy yet. In these cases, it’s unlikely there’s been any financial loss. This is because we can’t be certain whether they’d suffer financial loss as a result of the bonus being unavailable at exchange (but instead being available later, on completion).
While we can empathise with customers who are disappointed they can’t use the bonus for their exchange deposit, we wouldn’t automatically recommend payment towards trouble and upset, but may consider other awards.
If customers say they would have put their money elsewhere had they been given clear information, then we’ll see:
- whether that’s likely
- which alternatives would’ve been possible
If the customer is in the process of buying a house or has already bought one, we’d consider whether they’ve lost out as a result of the unclear information. For example, they may have had to borrow money to make up the shortfall in their deposit because information wasn’t clear. If they took a loan or used a credit card, we may recommend a refund of the interest charged plus 8% and we’ll also consider whether this caused trouble and upset to the customer.
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These ISAs invest in peer-to-peer lending investments and are sometimes called crowdfunding ISAs.
We may see complaints around suitability of innovative finance ISAs, a lack of protection from the Financial Services Compensation Scheme or complaints that risks weren’t explained clearly. -
These ISAs are for people under 40 and are designed to help first-time buyers buy their home or save for their retirement.
We may see complaints around suitability or complaints that risks weren’t explained clearly.
Find out more about lifetime ISAs on the HM Government website.
ISA allowances
Sometimes a customer has been unable to take up their ISA allowance in a tax year because of something you did wrong.
If we’re satisfied that it was your mistake that led to the customer not being able to use their allowance, we’ll consider whether compensation is appropriate. If it’s appropriate, our usual approach is to tell you to compensate the customer for any financial loss they’re likely to incur, as well as for any distress and inconvenience.
Missed opportunities to invest annual ISA allowance: three possible outcomes
1. Carlos missed out on a stocks and shares ISA allowance for one tax year.
He didn’t plan to use his ISA allowance in the following tax year. So he could replace the missed ISA immediately by investing the money (or moving the investment) into an ISA using his allowance for the new tax year.
2. Betty missed out on her stocks and shares ISA allowance for one tax year
She had enough money and investments to use up her stocks and shares ISA allowance for the next five tax years. But after that she didn’t plan to use her ISA allowance. So Betty could replace the missed ISA after five tax years.
3. Caroline missed out on her stocks and shares ISA allowance in one tax year
She had enough money and investments to use up her stocks and shares ISA allowances for the foreseeable future. And she had been making full use of her allowances for many years. This meant she’d be unlikely to replace the missed ISA by using a spare allowance from a future tax year. So Caroline’s investment would stay outside an ISA for as long as she retained it (we usually assume this lasts 10 years unless there’s evidence to suggest we should look at a longer or shorter period).
Tax liability
If a customer holds an investment outside an ISA, they may need to pay tax on:
- the returns it generates while they hold it (usually by way of dividends or interest)
- the money generated by selling it, that is, any capital gains
Not all customers have to pay tax on the returns from investments held outside an ISA. For example, basic rate taxpayers don’t usually become liable for extra tax when they receive dividends from their investments.
However, a customer may be liable to pay tax on an investment held outside an ISA if:
- the ISA pays interest distribution and the customer will be a taxpayer for some or all of the period that they hold it
- the ISA pays dividends and the customer is liable for higher or additional rate tax for some or all of the period that they hold it
- a profit is made when it’s sold and the customer's capital gains in that tax year are greater than their annual allowance
Where we consider it likely that the customer will have to pay tax on the returns from the investment, our approach depends on the individual circumstances of the case. But unless there’s evidence to the contrary, we’ll generally consider it reasonable to assume:
- any charges on holding the investment outside the ISA won’t be significantly different from those that would’ve applied had it been held within an ISA
- the customer will pay tax on the investment at the highest rate applicable to them
- the customer's tax position will remain unchanged for as long as they hold the investment
- the tax position of the investment will remain unchanged while the customer holds it
- if the investment pays dividend distributions, it will return 7.5% each year (made up of 5% growth and 2.5% dividend)
- if the investment pays interest distributions, it will return 6% each year (made up of 1% growth and 5% interest)
Customers sometimes say they’re liable for capital gains tax when selling the investment that should have gone into an ISA.
In these cases, we look at the customer's circumstances, including their investment history, to decide whether this is likely. The amount of compensation we might tell you to pay would depend on:
- how long the investment is likely to be held
- how much the investment is likely to grow in that time
- how the customer has used their capital gains tax allowance in the past
- the rate of tax the customer is liable for
Transfer rules
The rules allow customers to transfer:
- a cash ISA to another cash ISA with a different provider, which shouldn’t take more than 15 working days
- a stocks and shares ISAs to another stocks and shares ISA with a different provider, which shouldn’t take more than 30 calendar days
- only the cash element from your innovative finance ISA to another provider, but you may not be able to transfer other investments from it
- from one kind of ISA to another, for example, from a cash ISA to a stocks and shares ISA or vice versa
However, if you want to transfer money you’ve invested in an ISA this current year, you must transfer all of it.
For money you invested in previous years, you can choose to transfer all or part of your savings. For example, you can complete a partial transfer of a previous year’s stocks and shares ISA to a new provider. You can also sell some investments within a previous year’s stocks and shares ISA and transfer the proceeds to a cash ISA but leaving others invested.
To switch providers, you should contact the ISA provider you want to move to and fill out an ISA transfer form to move your account. If you withdraw the money without doing this, you won’t be able to reinvest that part of your tax-free allowance again.
If the transfer form doesn’t give you the option to partially transfer your ISA, you’ll need to either include a covering letter stating your instructions with your transfer form, or contact your stocks and shares Isa provider separately in order to make your intentions clear.
Handling complaints like this
We only look at complaints that you've had a chance to look at first. If a customer complains and you don't respond within the time limits or they disagree with your response, then they can come to us.
Find out more about how to resolve a complaint.
Putting things right
Where we’re satisfied that a situation arose because of an error you made, we’ll consider whether compensation is appropriate for any financial loss the customer’s likely to incur.
We may tell you to pay the customer compensation for any distress or inconvenience that may have been caused through missing out on their ISA allowance because of something you did wrong.
If an ISA manager accepts they got things wrong, HMRC may – in some circumstances – allow the ISA manager to correct the position and reinstate allowances as if the investment had happened as it should.
So we’ll try to sort things out this way. However, we’ll check each case individually with HMRC first.
We’ll consider other forms of redress if:
- the ISA manager doesn't accept responsibility for the error
- the business being complained about isn't the ISA manager
- the specific details of the error
Resources
Government guide on ISAs, including the maximum you can save in an ISA in each tax year.
Government’s ISA Manager bulletins to keep ISA managers informed of any new developments relating to ISAs.
