HMRC’s latest ISA bulletin has raised the question of eligibility for stocks and shares ISAs of some funds post RDR.
The issue revolves around the ‘5% test’, which says that for an investment to be eligible for a stocks and shares ISA, at the date of purchase:
· there must be no guarantee or agreement that the investor would receive 95% or more of their purchase price at any time in the next five years, or
· the nature of the investments held must not significantly limit the risk to the investor’s capital to 5% loss or less at any time in the next five years.
The test compares the price paid by the investor for the investment with the amount receivable on the sale. It thus applies after any initial, terminal or regular charges. If the investor is ‘certain or near certain’ to receive 95% or more of their original purchase price, then the 5% test is not satisfied. Depending upon its nature, the investment may alternatively qualify to be held in a cash ISA.
HMRC is concerned that post RDR some funds, which currently carry sufficient charges to pass the 5% test, will no longer do so. It quotes the example of a fund with an initial charge reduced to 0.5% post RDR, but retaining a guarantee that losses will be capped at 3%.
Existing ISA rules already prevent a stocks and shares ISA manager from acquiring securities which have less than five years to run to redemption, hence the widespread use of terms just exceeding five years for ISA-wrapped structured products.
Bulletin provided by Techlink.
Read more here: http://www.techlink.co.uk/bulletin.asp?ID=99878