Pre-Budget statement: ISA reform ‘too complicated’

The move is designed to extend the eligibility for ISAs to 100,000 under 18-year-olds who work and pay tax and to encourage savings and financial literacy among school leavers.

However, those individuals who have more than £100 a year invested for them in an ISA by a parent will find all investment income treated as belonging to the parent for tax purposes. Even though it arises in an ISA, the parent will have to report the income to their tax office.

The pre-Budget statement also provided evidence that confusion about ISA rules is widespread.

According to Inland Revenue figures, 85,000 individuals have taken out incompatible ISAs. According to the rules the second account must be closed and the capital returned to the investor. Any income or capital gains will be taxable.

Ann Redston, tax partner at Ernst & Young, said the fact that 85,000 accounts have been opened in error showed that the initiative is too complicated.

‘The writing is on the wall. This will be very disheartening for people who have been encouraged to save,’ she said.

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