Money trapped in cash vehicles such as Tessas and Tessa-only Isas will be eligible to be transferred into a tax-efficient equity wrapper for the first time when the Government’s rules to allow cash transfers come in next year.
Outlined in the 2007 Finance Bill, from April 5, 2008, investors will be able to transfer any cash Isa into a stocks and shares version, without affecting that year’s Isa allowance.
In theory, this means if someone has taken out a cash Isa every year since their introduction in 1999, they could invest up to 28,000 in stocks and shares in the 2008/09 tax year. This figure does not even include the amounts by which the investments have grown over that timeframe.
However, there is even more eligible tax-efficient cash available for transfer than just that which has been invested in mini cash Isas or the cash component of maxi Isas since 1999. According to groups such as the Pep and Isa Managers’ Association, the cash eligible for transfer also includes money that historically has been harboured in the old Tessa regime and their replacement product, the Tessa-only Isa (Toisa).
Tessas enabled 9,000 in cash to be saved in a tax-efficient environment for five years so when they stopped allowing new investments from 1999, the Government allowed the Toisa as an interim vehicle, enabling investors to roll the original capital, excluding any interest earned, from the Tessa investment into this taxefficient wrapper.
Once all Tessa money had matured the Toisa ceased to exist and the assets were considered, from a regulatory point of view, to be held within a cash Isa.
Most investors rolled over the Tessa assets as if they redeemed their full investment, then they would lose eligible tax benefits. This is because the Tessa allowed 9,000 to be sheltered whereas the cash Isa only allows 3,000.
If the investor had redeemed the Tessa and then reinvested rather than transferring to a Toisa, then they would have only be able to reinvest 3,000 in a cash Isa, effectively losing out on 6,000 worth of tax benefits.
So while Toisas technically no longer exist, it appears as if they still do, which is creating confusion as to whether this money will be eligible to be transferred into stocks and shares from next year.
Carol Knight, head of member services at Pima, notes that the marketing term Toisa is still used today to differentiate mini-cash Isas from the former Tessa investment, which is adding to the confusion as it may appear as if there is still a distinction between the assets when there is not. She says when the Government allows cash transfers to stocks and shares, this will include the former Tessa money, which potentially adds billions to the amount of eligible cash holdings.
HMRC compiles data on cash Isas and Tess although, due to the maturing Tessa, the last data on the separate units ends June 2005. In 2000/01, 792,000 Toisa accounts were taken out and 7.4bn invested.
This amount fell to 5.1bn in 2001/02 and to 3.3bn by the 2003/04 tax season. By the following tax year, 2004/2005 – whereby all former Tessa money would have matured – just 732m went into Toisas.
It is worth pointing out these statistics show how much was subscribed each year, not how much accum-ulated or compounded over that timeframe, nor the interest gained.
At the same time in 2004, there was 79.8bn in assets in cash Isas, jumping massively to 97bn the following year when Toisas were subsumed into the same regulatory remit as cash Isas, according to HMRC statistics.
Still, despite the fact that technically Toisas do not exist, many providers and intermediaries alike still see the assets as separate to cash Isas, as shown by a number of queries fielded by Pima since the Government first announced the forthcoming allowance of transfers into the stocks and shares component.
Again, like the Tessa to Toisa rollover, the forthcoming transfer allowance will make it more attractive to cash investors to transfer to stocks and shares but it will not be cheaper.
At the moment, if an investor has 15,000, for example, in cash Isas (including Toisa money), then the only way to move this into the stockmarket would be to encash the wrapper and reinvest the assets in a stocks and shares Isa. That would then be considered a new subscription and would take up that tax year’s allowance – enabling only 7,000 to be invested within the wrapper rather than the full amount.
From April next year, the full amount could be moved without affecting that year’s Isa allowance, meaning the full 15,000 could go into an equity or bond fund as well as a further 7,000 from that year’s allowance.
A cost, however, would still have to be borne and many investors will discover the stocks and shares Isa will cost them more then their current cash products on both an initial and annual basis.
A direct transfer from one wrapper to the other is unlikely to happen, Knight explains, noting instead that the cash holding would have to be first encashed and then moved across, which would be likely to incur a fee when it is reinvested in an equity fund, for example.