Inland Revenue 2
17 March 1998
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FAIRNESS IN SAVINGS
The Chancellor today announced details of the new individual
savings account.
The Government has consulted widely on the individual savings
account. It is very grateful to all those who sent in their
comments. The main features of the new account fully reflect
the Government s commitment to listen to the views of savers
and the savings industry alike.
The main features are:
- everyone will have the same opportunity to subscribe to the
new savings account, irrespective of the value of their PEP
and TESSA holdings;
- the new account will start on 6 April 1999 and be
guaranteed to run for at least ten years;
- it will have an annual subscription limit of 5,000 pounds,
of which no more than 1,000 pounds can go into cash and
1,000 pounds into life insurance;
- however, in the first year of the scheme only (1999-2000),
the annual limit will be 7,000, pounds of which no more
than 3,000 pounds can go into cash and 1,000 pounds into
life insurance;
- the account will be completely free of tax, and there will
be no statutory lock-in or minimum subscription;
- there will be no lifetime limit;
- subscriptions to PEPs can be made until 5 April 1999;
- all PEPs held at 5 April 1999 can continue to be held as
PEPs outside the new savings account, but with the same tax
advantages as the new account;
- savers will be able to open TESSAs until 5 April 1999 and
pay into them under existing rules for their full 5 year
life;
- capital from maturing TESSAs can be transferred into the
cash component of the new savings account;
- neither annual subscriptions to TESSAs nor any maturing
capital will count against the annual subscription limit
for the new account.
Objectives
As the Government has made clear, it has two key objectives:
- to develop and extend the savings habit;
- to ensure that tax relief on savings is fairly
distributed.
About half the population have less than 200 pounds each in
savings, and about a quarter have no savings at all.
The Government intends that future spending on tax relief for
saving will be broadly as much as would have been spent on
PEPs and TESSAs. But it has made it clear that it wants to
re-balance this tax relief to encourage people who do not
currently save to start saving; and to encourage people who
save only a little to save more.
DETAILS
1. The new savings account will be introduced from 6 April
1999.
2. Individuals who are both resident and ordinarily resident
in the UK for tax purposes and are aged 18 or over will be
eligible to subscribe to the account.
Components
3. The individual savings account can include three
components:
- cash (including National Savings);
- life insurance; and
- stocks and shares.
Subscription limits
4. Savers will be able to subscribe up to 5,000 pounds (7,000
pounds in 1999-2000) in each tax year, of which no more than
1,000 pounds (3,000 pounds in 1999-2000) may go into cash, and
1,000 pounds into life insurance. Husbands and wives will each
have their own 5,000 pounds (7,000 pounds in 1999-2000) limit.
5. The new savings account can be marketed either by
financial institutions offering savers one or more components
of the range of savings in the scheme, or by an independent
person offering other people s products. In each case the
account will be administered by a manager.
6. Savers will have a choice of managers; each year there
will be two options. The first option is that they can go to a
single manager. This manager must offer an account which can
accept the overall subscription. This means that the account
must include the stocks and shares component, but does not need
to offer either of the other two components. Savers will be
able to subscribe up to 5,000 pounds (7,000 pounds in 1999-
2000) to the stocks and shares component. If the manager
offers the cash or life insurance components in addition,
savers will be able to subscribe up to 1,000 pounds (3,000
pounds in 1999-2000) to the cash component and 1,000 pounds to
the life insurance component, with the balance going to the
stocks and shares component.
7. The second option is that they can go to separate managers,
one for each component, and subscribe up to 3,000
pounds to stocks and shares, 1,000 pounds (3,000 pounds in
1999-2000) to cash and 1,000 pounds to life insurance. These
fixed individual limits will help to ensure that the overall
annual limit can be satisfactorily monitored.
8. Shares received from an approved profit sharing or
savings-related share option scheme may be transferred into the
stocks and shares component at market value. The value
transferred will count towards the annual subscription limit
but no capital gains tax will be payable on the transfer.
9. Shares acquired under a public offer or received when a
building society or mutual insurer demutualises will not be
able to be transferred into the new savings account.
10. The Government has decided not to proceed with the idea of
a prize draw.
11. The scheme will run initially for ten years but will be
reviewed after seven years to decide on any changes after the
ten years. There will be no limits on cumulative subscriptions
to the new savings account other than that implied by the
annual limits.
Tax reliefs
12. Savers will be entitled to exemption from income tax and
capital gains tax on their investments. In addition, a 10 per
cent tax credit will be paid for the first five years of the
scheme, that is until 5 April 2004, on dividends from UK
equities. This will apply to equities in the stocks and shares
component of the new savings account, and to equities which
back policies in the life insurance component. Insurers will
also be exempt from tax on other income and gains that they
receive for the benefit of savers.
13. Withdrawals may be made from the account at any time
without loss of tax relief. However, once the maximum amount
has been subscribed to the account in a year, no further
subscriptions will be allowed that year, regardless of how much
is withdrawn.
14. These rules will not preclude providers from offering a
variety of products, including those which require notice of
withdrawal or a minimum subscription in exchange for higher
returns for savers. The key point is that, unlike TESSAs,
there is a no statutory lock-in.
Qualifying products
15. The savings products that can make up the new savings
account will broadly be those set out in chapter 4 of the
consultative document of 2 December. Key points are:
- the new accounts can include all the kinds of bank and
building society accounts and stocks and shares which
currently qualify for TESSAs and PEPs;
- some new products can be included, such as taxable
National Savings products, supermarket savings accounts
and life insurance (existing tax free National Savings
products will be unaffected);
- in addition, the rules which currently restrict the scope
of investments in PEPs will be relaxed and simplified for
investments in the new account.
16. The Government will be discussing with providers the
relationship between the new tax free cash account and other
taxable cash accounts. This will include consideration of the
use of feeder accounts similar to those currently available
with some TESSAs and allowing the new account to be part of a
wider savings account.
17. Insurance companies and friendly societies will be free
to offer a wide range of life insurance products within the
new savings account, so long as they are of the single premium
type. This means that savers must be under no obligation to
keep up premium payments in order to obtain policy benefits -
but insurers may, if they wish, offer policies with recurrent
single premiums payable for more than one year, or where the
amount payable during the year is broken down into, say,
monthly premiums.
PEPs and TESSAs
18. Savers holding PEPs at 5 April 1999 will be able to
continue holding them under the current rules, outside the new
savings account. These rules presently provide that no tax
credit will be payable after 5 April 1999. However, in line
with the rules for the new account, a 10 per cent tax credit
will be paid on dividends from UK equities for the first five
years, that is until 5 April 2004. The value of PEP holdings
will not affect the amount that can be subscribed to the new
savings account. No subscriptions to PEPs may be made after 5
April 1999.
19. TESSAs taken out by 5 April 1999 will be able to run
their full five year course. Savers will be able to continue
subscribing to these TESSAs under the current rules and will
be able to transfer their capital (but not accumulated
interest) into the cash component of the new savings account
when the TESSA matures. Neither the annual TESSA
subscriptions nor any capital transferred from a TESSA will
affect the amount that can be subscribed to the new account.
No new TESSAs can be taken out after 5 April 1999.
Tax regulations
20. The Government will start discussions shortly with
interested parties about other, more technical, issues which
will be the subject of regulations. The Government hopes that
draft regulations will be issued around the beginning of May
for consultation, with a view to their being laid before
Parliament towards the end of July.
Financial regulation
21. The Government has been discussing the regulatory
requirements of the scheme with the Financial Services
Authority (FSA) and other interested parties. It is envisaged
that the new savings account should be regulated in the same
way as the components which make it up. The FSA will consult
about regulation, where any new provisions may be required, in
good time before the launch in April 1999.
22. The Government has been looking at the possibility of a
voluntary benchmarking system to ensure that small savers have
access to products which are straightforward, easy to
understand, and with no hidden catches. It will be issuing a
consultative document on this in due course.
Friendly societies
23. The Government confirms that it proposes to extend the
payment of the 10 per cent tax credit for the same five year
period to friendly societies in respect of their small life
policies which qualify for a special tax exemption.
NOTES FOR EDITORS
A consultative document The New Individual Savings Account
was published on 2 December 1997 giving details of the
Government s proposals. Comments were invited by the end of
January 1998. This was part of the national pre-Budget debate
launched by the Chancellor of the Exchequer on 25 November
1997.
2. PEPs were introduced on 1 January 1987. Savers may
subscribe up to 6,000 pounds a year to a general PEP which
invests in certain shares and securities, and in authorised
unit and investment trusts and open ended investment companies
which meet certain investment criteria. In addition, savers
may subscribe up to 3,000 pounds a year to a single company PEP
investing in the shares of one company. Income and capital
gains are tax free. There are about 3 1/2 million PEP savers
and the tax relief is estimated to cost 800 million pounds
1997-98.
3. TESSAs were introduced on 1 January 1991. They are
special accounts - usually with banks or building societies -
to which savers aged 18 or over can subscribe up to 9,000
pounds over 5 years, subject to annual limits. Interest is tax
free. There are about 4 3/4 million TESSA savers and the tax
relief is estimated to cost 450 million pounds in 1997-98.
4. A compliance cost assessment (CCA) will be published when
the draft regulations are issued for consultation around the
beginning of May.
5. A friendly society is already exempt from tax on the
investment return from the fund in which it writes certain
kinds of life insurance business and can pass on the benefit of
the exemption to its members in the form of enhanced benefits
under their policies. There is a limit on the amount of the
premiums that can be invested in such policies, which currently
stands at 270 pounds a year where premiums are paid annually,
or 300 pounds where they are paid more frequently. To qualify
for the exemption policies must meet certain conditions. For
example, they must require the payment of level premiums for
ten years or more, and provide a specified minimum level of
life cover. Where this exemption runs, the societies will be
able to claim payment of a 10 per cent tax credit on dividends
that are received in the tax-exempt fund between 6 April 1999
and 5 April 2004.
6. The revenue effects of introducing the new account are
estimated to be negligible in 1998-99, a yield of 30 million
pounds in 1999-2000, and a cost of 30 million pounds in 2000-
01.
INLAND REVENUE PRESS OFFICE
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