Isa holders face double trouble

Isa holders face double trouble

A change in the Individual Savings Account (Isa) allowances last April means many investors may be breaking the rules and could find themselves losing out on tax privileges.

The potential confusion has arisen after the disappearance of insurance Isas as a separate component for the 2005/06 tax year. Instead, insurance funds now qualify for inclusion in stocks-and-shares Isas.

Previously the maximum that could be invested in insurance was £1,000 a year, either as a separate mini Isa or as part of a £7,000 maxi Isa. A further £3,000 could be invested in cash, and £3,000 or up to £7,000 in stocks and shares, depending on whether investors chose a mini or maxi Isa.

Most investors who chose insurance Isas in the past did so via the mini route, often splitting their investments between different providers for each asset type. Now there are only two sorts of Isa - cash, and stocks and shares - and the mini stocks-and-shares allowance (including insurance funds) has risen to £4,000.

Insurance providers are particularly pleased that investors can now increase their investment from £1,000 to £7,000 if they wish. Julie Darroch, spokeswoman for Co-operative Insurance, said: 'We campaigned strongly to have the insurance limit increased.'

But investors who opened both an insurance and a stocks-and-shares Isa last year are in danger of having ended up with two stocks-and-shares Isas this year. Regular.....continued below

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savers are particularly at risk of having broken the rules if they failed to cancel one of their direct debits before the start of the current tax year. If their subscriptions have continued, one of their Isas will be void, as they are only allowed one stocks-and-shares Isa per tax year.

Although insurance Isas were never as popular as other types, figures show that there were nearly 300,000 accounts running in January this year. Leading firms such as Co-operative Insurance and Scottish Friendly say they warned their savers before the end of the tax year to cancel direct debits to other stocks-and-shares Isas if they wanted to continue putting their savings into an insurance fund this year. But CIS gave more prominence to the news that investors in its insurance Isas would be able to save more this year.

Scottish Friendly is also about to encourage savers to increase their subscriptions. Marketing manager Calum Bennie says: 'We have seen our with-profits Isa growing in popularity among older age groups in recent years and we are expecting that to continue.' Bennie points out that investors who had put £1,000 into a Scottish Friendly insurance Isa in 1999 would have been able to withdraw £1,309 this January, which is equivalent a tax-free return of 5.1 per cent per annum. But past performance is naturally no guarantee for the future.

Investors who increase their savings to an insurance fund may not only be breaching the single stocks-and-shares Isa rule, but could also exceed the £4,000 overall limit for the mini Isa. They won't be officially informed they have done anything wrong for some time. Peter Shipp, technical director of Pima (the Pep and Isa Managers Association) explains: 'If there are problems they won't be spotted until autumn 2006, when the Inland Revenue will check this tax year's Isa accounts.'