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HMRC allows compensation on Isas to be invested in full

HM Revenue & Customs has outlined plans to allow Isa investors who suffer losses and are then compensated to be allowed to reinvest the compensation within an Isa wrapper, regardless of its size.

However, investors will only be able to reinvest the compensation paid rather than the full Isa investment that had been built up and lost.

Any compensation received after April 6, 2009 in respect of an Isa investment will be eligible under the plans which were announced in an HMRC Isa bulletin and are open to consultation until January 21.

HMRC previously made two exceptions allowing those who were compensated for the Icesave and Keydata SLS failures to reinvest the full proceeds within an Isa.

But in the previous cases, HMRC allowed Isa reinvestment up to the total value of investments made but, under the current plans, investors will only be able to reinvest up to the value of compensation received.

For example, savers who build up a £50,000 Isa that collapses and who then only receive the maximum FSCS payout of £48,000 would lose the entitlement to the extra £2,000 of tax-free Isa investment that they had built up.

An HMRC spokesman says: “The draft regulation would allow any compensation received in respect of an Isa investment to be paid into an Isa in addition to the annual subscription limit.”

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