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Kick-out contradictions

Ian Lowes, managing director of Lowes Financial Management and founder of StructuredProductReview.com, spots a contradiction between the Isa rules and HMRC’s application of Bulletin 19.

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Far be it for me to suggest HMRC is applying dual standards when it comes to Isas but the current pedantry surrounding Bulletin 19 which may affect the eligibility of some structured products with ‘kick-out’ clauses to be Isa-able, and a personal tax experience this week have thrown up an interesting contradiction.

Bulletin 19 states that plans which have a ‘kick-out’ feature where the security might be redeemed within a five-year period if the ‘kick out’ is triggered, may not be an investment qualifying for inclusion in an Isa.

We are already seeing providers issuing their interpretation of this clause, and how they believe it does not apply to their specific circumstances but it is the responsibility of the Plan Manager for ensuring each plan is Isa-able and as IFAs we will be looking for reassurance that the plans into which we have placed our clients fall firmly within the ISA rules and will receive full tax benefits.

At the same time you have to question why HMRC has now started clamping down on this area (which may bring them little extra revenue since redemptions can be offset against CGT limits) when they are more than willing to allow an individual ISA holder to invest in two Isas to the full without requiring them to redeem either.

My evidence of that is a templated letter I received this week from the tax man, pointing out (wrongly I hasten to add) that Mr I Lowes had fully invested in two separate ISAs in the tax year to 2009, which, of course, is against tax rules. I expected to be told to close one down but the letter told me ’not to worry’ and I should do ‘Nothing’ as the tax man realised ‘it is easy to make mistakes’.  The bottom line is that they were going to let me get away with it this time. All I had to do was read the Isa rules on the back of the letter so I knew not to do it again!  I now wish I had.  As it turns out, the error is on the part of one of the providers who reported incorrectly to HMRC but I now feel somehow that I’ve lost my apparent, once-only opportunity to double up on my Isas.

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