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Wednesday, 8 November, 2000, 21:41 GMT
Taxman chases illegal ISAs
A financial adviser with clients
Some financial advisers sold ISAs without checking if investors already held them
By BBC personal finance reporter Andrew Verity

More than 85,000 investors are holding Individual Savings Accounts that are illegal, the Treasury revealed on Wednesday.

Buried in the detail of the Chancellor's pre-Budget report is confirmation that 85,000 savers should never have been sold an ISA - because they already had one.

In many cases, building society and bank staff, under pressure to sell ISAs, failed to warn investors they should not buy an ISA if they had already opened an account.

The 85,000 savers with illegal ISAs will be forced under Treasury rules to dissolve the second account. The manager of the ISA account will typically send them a refund of their original investment, while any tax relief will have to be repaid to the Inland Revenue.

Rules confusion

Under the rules for ISAs, savers can take out just one each year. That can be either a simple savings product, typically a building society account (a "mini-cash ISA"). Up to 3,000 can be invested in these.

Or it can be a more complex version which also allows them to invest in stocks and shares (a "maxi-ISA").

Unlike normal savings accounts or shareholdings, the investments grow tax-free. To prevent people taking advantage of this to avoid tax, it is illegal to hold more than one.

But in the early days of ISAs, confusion about the rules led some bank staff to sell an ISA without fully checking whether the customer already owned one.

In many cases customers were also at fault because they signed declarations, often without reading them, stating they did not already hold ISAs.

7,000 limit retained

Because of the confusion, the financial services industry wanted the Treasury to make allowances for savers holding illegal ISAs.

Today it was disappointed.

But financial advisers did welcome two other important developments:

First, the Chancellor said the tax-free limit on ISAs - the amount that can be saved tax-free - would stay at 7,000 for five years (or 3,000 for mini-cash ISAs). It had been due to fall to 5,000.

Second, young people aged 16 and 17 will now be entitled to hold a cash ISA, meaning they too can have tax-free savings even if they are working.

Previously, cash ISAs were only available to those over 18.

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Isa's first year reckoning
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