As The Independent reports:
The number of “Isa millionaires” has surged to more than 4,000, according to HM Revenue & Customs (HMRC) figures.
Some 4,070 savers were sitting on Isa pots worth more than £1m, as of April 2021, according to the data, obtained following a freedom of information (FOI) request on behalf of financial services network the Openwork Partnership.
The number of Isa millionaires has nearly tripled year-on-year from 1,480 in 2019/2020, according to the HMRC figures.
ISAs are Individual Savings Accounts. Introduced in 1999 to replace a previous Tory-created tax-incentivised savings plan, ISAs were meant to achieve three things.
First, they were meant to increase savings, even though all that savings in the form that ISAs represent is to withdraw money from active use in the economy.
Second, they were supposedly targeted at those with more limited means to save because caps on the annual amount that could be saved were relatively limited at first, obviously with the intention of reducing the opportunity for abuse.
Third, they were meant to do this by providing a subsidy in the form of tax-free income and capital gains for sums saved within the ISA.
Until 2010 the total annual subscription limit was at most £7,200, with half of that having the be held in shares. Since then, the limits have increased considerably. £20,000 may now be saved per annum, with all of that being capable of being held in cash if the saver so desires. However looked at, saving £20,000 per annum is not an economically normal activity.
So, how do ISA millionaires come about? That required good stock picking and saving in shares, probably to the maximum amount each year. The result is a considerable likely tax subsidy to those who have used the scheme in this way.
What is clear is that the spirit of this scheme, which was focused on smaller savers, is being abused as a result.
Both the horizontal equity and vertical equity of the tax system are being undermined as a consequence. Income of similar sorts is not being taxed in the same way (horizontal inequity), and progressive taxation is being undermined (vertical inequity). At the same time, tax subsidies (ISA subsidies cost about £4 billion a year) are not being used as intended.
The action required to address this abuse is threefold. First, there should be a lifetime maximum subscription to ISAs. £100,000 might be fair and is still well beyond the reach of most people.
Second, in exchange for the tax relief, the funds saved should be used for social purposes. I have long suggested green bonds be issued to assist this.
Third, if the funds in an ISA grow to more than a limit (£200,000 would appear generous), then funds in excess of that sum must be transferred to an account not enjoying tax exemption.
As it is, this relief is being used to increase income and wealth inequality in the UK, and that is unacceptable and is not a purpose of tax relief. The suggested reforms seem to be an obvious step to take in that case.
PS: This may become one of the recommendations in the report I am preparing on available tax reforms within the UK economy. It's simple, it's fair, and it's not hard to do. It will create tax justice and save money wasted on those who do not need it. Why would a politician refuse to do it?
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Another result for the wealth growth industry with a corresponding loss it seems for real industry.
Completely agree with a limit on ISA balances.
Given how generous these have become, it should be a no brainer.
That said, I think initially the limit should be higher, to help lessen the inevitable attacks on the policy “they’re coming for your savings” “they’re anti-growth” etc.
It could be tapered down over time.
No doubt those ISA millionaires are sat on rather large latent CG gains, for which there may need to be some transitional relief given too…
Politics is the art of the possible after all
To be honest I am slightly surprised that there are 4000 ISA millionaires, I would have expected a small handful given as you say they will have to have contributed every year and been lucky with their choice of share investment. However what is clear is that these people are not those who need incentives to save, they are people with plenty of wealth who have made maximum use of the available tax relief over many years. Creating a lifetime total allowance would be a fair way to maintain the incentive without it being used excessively.
(By contrast, the lifetime allowance which was previously applied to pension savings was not a good solution, given that valuations of different types of pension funds were not comparable. But in that case I would limit the annual allowance more – to the amount of salary subject to basic rate tax, with the tax relief restricted to that rate).
I am less convinced by your idea of creating a limit to the value to which funds can grow, it introduces complexity which the benefit probably doesn’t justify. The magic of compound investment means it will inevitably be reached at some point even with simple cash accounts, and the volatility of share-based investments creates problems with valuation.
Introducing a lifetime allowance would create the question of how to handle those accounts which are already above it, but I guess for any tax change the transition needs to be managed. In deciding a lifetime allowance it might be worth looking at the distribution of total ISA investments (subscriptions), since it would probably not be politically sensible to introduce a change which appears to penalise a substantial proportion of current savers.
While I agree that government should introduce incentives for investment in renewable resources, I tend to think that those should be designed around what they are intended to achieve rather than get muddled up with an existing tax relief with different aims.
I allowed 100% growth!
100% sounds a lot, but would be achieved in around 15 years at current rates of interest on cash accounts. And Building Society rates have been higher at times in the past. And that’s without considering share-based investments, which admittedly can go down as well as up.
It isn’t a matter of whether there is logic in the approach, it is more about a change having to be politically acceptable. As Arabella’s comment below indicates, there would be a lot of emotional backlash from appearing to penalise those who have saved in the past; those older people who have built up savings over years to protect against the fear of care expenses would undoubtedly be weaponised by those who simply use ISAs to minimise tax on wealth they already have. It is something I know from my late mother who was very possessive of her ISA savings (which wouldn’t have breached your upper limit); they were indeed drawn on when she needed residential care.
I think a lifetime limit on investment in tax-favoured savings account would be the right thing to do, and achieving it wouldn’t be helped by appearing to punish savings already made and earning interest.
So you would rather we subsidise the wealthy than use tax reliefs fairly? Have I got that right?
Why?
And you would rather we have weak politicians than those with courage to do the right thing?
Why?
Sorry, that isn’t what I was trying to imply. My point is we need practical politics, not idealistic politics that is impractical. There usually need to be compromises somewhere, and in this case I would think it would come in at least some aspects of historical ISA assets. To my mind it makes sense to keep gains within an ISA untaxed – which is after all their key feature – but on introducing a lifetime allowance have some sort of transition over which historic investments (subscriptions plus subsequent gains) over the new allowance have to move to taxed accounts.
But first we need a political party to adopt the idea.
Ok, we’d call that some sort of grandfathering arrangement. I am notkeen on them, but I get your point now. Thanks.
For historical ISA assets, if they are to be brought within the scope of capital gains tax again, I think we’d just need to set a date on which the market value is used as the cost of the assets. In other words: we’d only try to tax future gains after that date.
Taxing earlier gains would be problematic for various reasons. Including that people have been told that they don’t even need to keep records of the cost of assets inside ISAs. And that it would be unfair to tax somebody who’s held the same assets inside ISAs for a long time (and now has large unrealised gains) more than somebody who recently switched the assets inside their ISAs (and so realised large gains tax-free, and now has much smaller unrealised gains).
Sorry – but that’s ludicrous.
Let me provide a simple example. When CGT was introduced it was not for only introduction gains.
And a change in CGT allowance – as happened this year – was not only for future gains.
And when MIRAS went, it went on loans it had applied to.
If a relief is wrong and benefits those who do not need it then it has to go.
Did you yell about the bedroom tax applying to people who already had a skate bedroom? No? Then you most definitely can’t complain about this.
So Richard you want to tax all income and CGTgains retrospectively from 1986 when the forerunner to ISAs, PEPs were introduced? How do you expect people to unearth these records. Literally 100s of transactions could have occurred within a single wrapper. Also many of the early providers will no longer exist. And how on earth do you expect HMRC to supervise this?…for someone why puts himself out as understanding the practical implications of tax i an surprised by your suggestion as this is about as impractical as they get.
That is the taxpayer’s problem
They should keep account details
You also reveal your ignorance: tax is by self assessment: this is not HMRC;s problem.
Note also that the reduction in CGT allowance this year potentially creates the same issue
You really are talking nonsense
I’m not clear to what extent you’d like to tax past capital gains inside ISAs. It’s not impossible to do that, of course, but I’m a bit surprised that you seem keen to.
I prefer my idea of taxing *all* future income and gains inside ISAs, but no income or gains before a specified date (when this change is brought in), and using the market value at that date as the cost basis for assets currently held inside ISAs. You prefer lifetime limits on both ISA subscriptions and current ISA value, and some taxation of past gains (and income??) which exceed the limits. Perhaps this comes down to the question of whether tax exemptions for ISAs now serve any useful purpose.
Green bonds with some tax exemption (I strongly believe any such exemption should be time-limited, to avoid repeating the issue we’re now seeing with ISAs) are in some ways a separate matter. They could come under the ISA label or not.
Incidentally, I would prefer to make ISAs subject to tax, rather than to abolish them. They could still be a convenient wrapper to hold investments in, and to get useful annual reports from the ISA manager about your taxable income and gains. The limit on annual subscriptions could then actually be abolished, and other now-unnecessary rules scrapped.
I think getting bogged down in detail is inconsequential.
No one writes para 17 sub clause 7 when suggesting such changes
The principle is what matters. Compromises to achieve it come along the way
One of the most important aspects of ISAs is their simplicity, which sets them apart from the complexity of pensions. This is much appreciated by regular savers especially those without professional advisors to guide them.
I manage my 92 year old mothers financial affairs, including her significant care costs. Having inherited my father’s ISA pot four years ago she has an ISA of around £220K which provides some untaxed income and as the years go by she withdraws circa £20K as shortfall . Given that on my father’s death there was a loss of his personal allowance her taxes have increased so I view this access to ISA savings as a significant offset.
As later life care costs only continue to increase I think your proposals are too low and too restrictive.
We will have to disagree
I completely agree with limits to tax relief on ISAs.
Thanks so much for raising this issue.
I don’t see a problem with limiting tax relief to, say £100k. Sure, the current beneficiaries will scream. But it is not a question of “coming for their savings”. It’s a question of removing an inequitable tax relief. No “normal” person can possibly save £20k per annum. If anyone thinks this in anyway normal they don’t live in the real world. So these ISA millionaires are not people who need savings subsidies.
All that putting a cap on ISA saving would do is to say that, hence forth, you will have to pay the normal income and capital gains tax on your large savings. The savings themselves are not affected and you are free to do with them as you will. It’s just that they no longer have special treatment. If you’re an ISA millionaire you’ve had it good for a long time. Suck it up and don’t whine if you no longer get an unjustified tax break.
Of course it requires deft handling to get this message across with a biased media. But there is no need to phase changes of be apologetic.
I remember when ISA was introduced, the limit was seen as an aspirational savings target to help build for the future. Almost a recommendation from Government as to what you needed to be putting aside. People actively tried to use it.
Then the limit went up beyond reason – this was no longer a plausible target, or a limited resource you’d be missing out on if you didn’t make use of it. the incentive to use it failed, and as the limit went up, people saved less (except the very well off it seems).
I think it did work well at the beginning, but it’s been perverted in favour of the wealthy. While a lifetime limit does make sense, I don’t think it’ll go back to serving it’s purpose unless the annual limit drops back as well.
Fair point
I have followed you for a while, but this might be the most ridiculous piece you’ve done to date. Reasons below:
1. Limiting ISAs to green-bonds… That would disincentivise investors massively, they would fly away from IASs immediately. Unless it’s government backed offering significant guaranteed returns. Few use an ISA to invest in bonds.
2. ISAs are deflationary, encourage saving. We like deflationary measures at the moment.
3. The millionaires are MASSIVE MASSIVE outliers. That’s obvious. They picked a small penny stock or similar that has blown up. They got lucky. It happens.
4. The £200k limit that “seems fair” is maybe fair now, but in a few years time will not be “fair” because of compound growth & inflation. It will become a tax trap similar to pensions which the well informed manouevre around and avoid whilst the less informed pay the tax. Similar to the old LTA.
5. Why won’t a politician do it? Because it’ll be massively unpopular with savers. And for the obvious reasons above.
All in all, a pretty terrible post from someone who I thought was well informed. I would suggest completely ignoring this point in your tax reform paper or it will get thrown in the bin.
Let me reply in kind.
Your comment is ridiculous.
Vast amounts of cash is saved in bonds. They are 1 year, 2 year and three years usually. It’s just a name for a fixed term account. If you don’t get that, don’t comment.
And, if you followed the link (you clearly did not) you would have seen that of course they would be government guaranteed.
And no, we do not like defaltionareay measures at the moment. We badly need a stimulus and investment.
After that I gave up. Frankly I did not have time to waste with your pedantry.
Don’t call again, at ealst until you have bothered to learn how things really work.
Judging by the comments on twitter your idea is very unpopular..
Based on my experience that suggests it is a good one then. If it’s upset those who want to abuse tax reliefs it is on target.
I hold a lot (though not a million) in ISAs, and I think they serve no useful purpose whatsoever. I think the original purpose was ISAs was to benefit the financial services sector, by encouraging people to put more money into its clutches, where the charges they extracted were generally higher than the tax saved by the ISA holder.
Charges have since become more transparent (which can mean lower – *if* the ISA holder is careful), thanks to some positive regulatory changes, viz. requiring the costs of financial advice and investment platforms to be unbundled. So the benefit of ISAs may now flow more to the holders, but (as you say) that means mainly to people in higher tax brackets or with a lot of capital.
I actually think your solution is too modest. I would do away with future exemptions from income tax and capital gains tax for existing ISAs altogether. They serve no purpose. The broader the tax base, the lower the rates can be. This should be made an explicit part of the argument for removing these reliefs: would you prefer to pay tax on ISAs, or to pay an extra 1p (or however much would raise the same amount of revenue) on the rate of income tax?
If you want to encourage some new savings bond, then you could offer an income exemption *only* on new investments in that bond, for a limited maximum investment per year, and only for the first 5 or 10 years it’s held.
I do have some sympathy with people who struggle to understand the complexities of capital gains tax, which ISAs are a way of avoiding. Sympathy with how difficult it can be to work out whether you have a liability, not with paying the tax. I think the CGT rules could be simplified so that the ISA manager is easily able to calculate the taxable capital gain and include it on an annual report. The 30-day (anti-bed & breakfast) rule would be abolished. Pooling average costs of holdings held in different accounts would also have to be eliminated. For existing ISA investments, there would be a start date on which the market value is used to start measuring gains (so no attempt to tax past gains inside ISAs). When investments are transferred between ISA managers, the old manager would need to tell the new manager the cost basis of each holding, so that they could calculate future capital gains.
And making it easy to calculate capital gains automatically is doesn’t only make it easier for taxpayers who aren’t tax experts and want to follow the rules. It’s also makes it easier to reduce tax evasion by those who don’t want to follow the rules.
Thanks
Good to hear a differing view
The easiest form of tinkering would be to simply put an upper limit the amount of ISA income that is exempt from income tax. Any income over £10k per year arising within an ISA could be taxable in the hands of the recipient as income in the normal way.
Capital gains are more difficult to deal with, but with the exception of a self-select ISA capital gains rarely arise anyway, so it is perhaps not worth creating the mess that results from pursuing that.
A relatively trivial tweak on the whole.
Noted, but since gains clearly matter not what I am looking for.
If gains matter then there is perhaps an argument that UK Unit Trusts should be more like US Mutual Funds. As I understand it a US Mutual Fund calculates and reports the capital gains (and losses) on the sales of underlying assets and reports that along with the income every tax year. The holder of the mutual fund then pays both capital gains tax and income tax annually on the assets they hold indirectly through the Mutual Fund.
This is a relatively easy way to deal with capital gains which eliminates indefinite roll-up, allows the holder to make use of their annual capital gains allowance and reflects the underlying substance. It would also remove the current disincentive to make alternative investment choices which arises as a result of deferred capital gains tax roll-up.
Uncapped tax reliefs and exemptions often cause problems. Why exactly should we allow people with a spare £20k each year – a sum which is approaching median earnings – to benefit indefinitely from a tax free wrapper? Reducing the maximum input amount and adding a lifetime allowance makes a deal of sense. Just as having maximum input and overall amounts for pensions tax relief, or (as most countries do) a cap on the capital gains exemption for the main private residence.
I will get to that last point….
In fact over 40 % of the population earn less than £30,000, so none of those will be able to save anything, I would think, particularly if they have rent or mortgage to pay. So ISAs are not really aimed at the lower paid at all.
It seems obvious that the whole ISA scheme is, as Prof Murphy says, not fit for purpose and has helped those who don’t need incentives to save the most.
Comments have referred to the fact that many elderly people view their ISA savings as a sort if guarantee against long tern care costs.
This is understandable and linked.
Some sort of cap on care costs is long overdue.
The world is so interlinked there needs to be more joined up thinking.
Well done for pointing out some of the unintended consequences of our economic system. Let us hope some brave politicians get the message.
Thanks
Good afternoon
I found this today which you might find interesting
An FOI request to HMRC has revealed that the number of share ISA millionaires
has almost doubled since 2020.
The average holding of the top 60 is now £8.5m!!!
The average age of an ISA millionaire is 74, while the youngest is 39.
https://ifamagazine.com/…he-openwork-partnership