ISA investors stung by nearly 3 per cent stock transfer costs

Alliance Trust calls on Treasury to remove sale and buy-back requirement and to allow in specie transfers.

ISA investors who want to move stock from their existing portfolio into an ISA to use up this years tax-free entitlement could be hit by costs of more than £200, according to Alliance Trust Savings, a leading ISA and PEP provider.

The costs, which equate to almost 3 per cent of the £7,000 annual ISA limit, are the result of Treasury rules which force ISA investors to sell holdings and buy them back inside an ISA. An investor who has transferred £7,000 worth of stock into an ISA each year since the tax-free investment products were launched in 1999 could have lost out to the tune of £640 already as a result of this requirement, rising to £2,150 when lost investment growth is taken into account.

Before ISAs, PEPs carried the same costly sale and buy-back requirement, meaning a committed PEP and ISA investor could have lost much more over the years simply through choosing to transfer existing holdings into a tax-free environment. At the other end of the spectrum, over 4 million people hold equities but do not have a stocks and shares ISA at all, according to recent research from www.unbiased.co.uk, the service for finding local independent financial advice.

Alliance Trust calculates the cost of transferring stock into an ISA as follows:

Bid/ offer spread of 1 per cent: £70
Salecharge: £15
Re-purchase charge: £15
Stamp duty: £35
Market movement of 1 per cent £70
Total cost of transfer: £205

Malcolm Dodds,PEP and ISA Manager at Alliance Trust, comments: “Transferring assets into an ISA is a perfectly legitimate way to use up your annual tax-free investment entitlement, but investors must be aware of the associated costs and weigh up whether they would be better off making new investment into their ISA rather than shifting existing stock in. There is no logical reason for this requirement to sell holdings then buy them back inside an ISA and investors are being penalised arbitrarily. The Treasury scrapped these restrictions for pension savers as part of last yearls A-Day changes, and we urge them to do the same for ISAs by allowing what are known as in specie stock transfers. Last year we had pensions simplification and it is now time for ISA simplification to stimulate meaningful long-term savings activity. The changes the Government announced recently that mean PEPs and ISAs will eventually be merged are a welcome first step.”

Alliance Trust continues to call on the Treasury to increase the ISA subscription limit from its original 1999 level of £7,000 to take account of inflation. If this limit had been linked to the Governmentls preferred measure of headline inflation, the Consumer Price Index, it would already be 10 per cent higher at £7,677 per year. Alliance Trust believes a boost in the subscription limit is essential to ensure that ISAs continue to act as a long-term savings incentive.