ISA investors stung by stock transfer costs

ISA investors who want to move stock from their existing portfolio into an ISA to use up this year's tax-free entitlement could be hit by costs of more than £200, according to ISA and PEP provider, Alliance Trust Savings.

The costs, which equate to almost 3% of the £7,000 annual ISA limit, are the result of Treasury rules which force ISA investors to sell holdings and buy them back inside an ISA.

An investor who has transferred £7,000 worth of stock into an ISA each year since the tax-free investment products were launched in 1999 could have lost out to the tune of £640 already as a result of this requirement, rising to £2,150 when lost investment growth is taken into account. The latter assumes a standard FSA Financial Services Authority projection of 7% used for calculation, minus 1% expenses.

Before ISAs, PEPs carried the same costly sale and buy-back requirement, meaning a committed PEP and ISA investor could have lost much more over the years simply through choosing to transfer existing holdings into a tax-free environment.

Alliance Trust calculates the cost of transferring stock into an ISA as follows: Bid/ offer spread of 1%: £70; sale charge: £15; re-purchase charge: £15, stamp duty: £35 and market movement of 1%: £70. Therefore total cost of transfer: £205.

Malcolm Dodds, PEP and ISA Manager at Alliance Trust, makes the point that transferring assets into an ISA is a perfectly legitimate way to use up your annual tax-free investment entitlement. However, investors need to be made aware of the associated costs and weigh up whether they'd be better off making a new investment into their ISA rather than shifting existing stock in.

"There is no logical reason for this requirement to sell holdings then buy them back inside an ISA and investors are being penalised arbitrarily.

"The Treasury scrapped these restrictions for pension savers as part of last year's 'A-Day' changes, and we urge them to do the same for ISAs by allowing what are known as in specie stock transfers.

"Last year we had pensions simplification and it's now time for ISA simplification to stimulate meaningful long-term savings activity. The changes the Government announced recently that mean PEPs and ISAs will eventually be merged are a welcome first step," says Dodds.

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2007-03-05 12:05:29 © Moneyextra.com