An inconvenient restriction

I am aware of the facility to hold cash for a short time in Equity ISAs, such as during transfers, but why not for a longer period?

During the last fall in the market, from the peak of 1999/2000, I wanted to avoid the large drop in value by cashing my ISA investments and returning to the market once it had bottomed out. I could not do this without losing my ISA ‘shells’, which I had accumulated over the years.

This seriously affects my investment strategy, but for what reason? Could you please explain the Chancellor’s reason for not giving ISA investors the freedom to hold cash for an extended period?

R Bryant, Poole, Dorset

Andrew Merricks replies:

I couldn’t agree more with Mr Bryant about the irritation caused by not being allowed to treat cash as an investible asset within the wider ISA arena. It would appear that HMRC is paranoid about us receiving tax-free returns on our cash.

For this reason, we have to accept the nonsensical situation of tax-free losses as well as tax-free gains on our ISA investments, despite the fact that the tax-efficient wrappers provided by ISAs are supposed to be an incentive for us to save more. I suspect that we lost a generation of savers during the bear market of 2000-03 simply because investors were unable to protect their savings from punishing falls.

You might well ask,‘Where is the incentive to save?’ It would appear that HMRC’s paranoia is deepening, however, as from next year we will be able to transfer from cash to equities within our ISAs, but not in the opposite direction. The suspicion is that in allowing cash to exit to equities, HMRC wants all tax-free cash to be a thing of the past, thus creating a major barrier to anyone who does not want to accept risk for their savings.

Andrew Merricks is head of investments at Skerritts Consultants