The dark side of ISAs

Individual savings accounts (ISAs) are well known as a highly tax efficient savings wrapper. In 2017/2018 tax payers can invest up to £20,000 in ISAs and these are tax-free vehicles which are not subject to either income tax or capital gains tax. However there can be occasions when investors regret acquiring shares within an ISA.

Take the example of Fred whose AIM shares were recently delisted:

 

Example

Fred heard about a ‘dead cert’ share tip from the pub landlord. Being a shrewd man and averse to paying 20% capital gains tax on his future anticipated gain Fred used £50,000 of ISA funds to invest in the shares. Sadly the share price bombed and the shares were even delisted. The next thing Fred knows is that the shares have been shunted out of the ISA and into his own hands because ISAs cannot hold unlisted shares. A few months later the company goes bust and Fred consoles himself with the £50,000 capital loss which he can offset against future gains (because he has a new top tip from the landlord!).

Only he doesn’t have a loss! The shares’ decline occurred within the ISA and so Fred only acquired the shares at the very low cost when they were shunted out of the ISA. Furthermore, if the shares had made a miraculous recovery then he would have had to pay tax at 20% on almost all of the proceeds.

 

Any lessons to be learnt?

This highlights the point that ISAs can block the availability of capital losses for investments that go bad. Although nobody goes into an investment where a loss is anticipated, this may point to an argument for leaving more volatile investments out of an ISA. Any gains that crystallise in personal hands can often be managed (through the use of annual exemptions etc) but losses within an ISA will be lost for good.

 

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