Explanatory note

These Regulations amend the Individual Savings Account Regulations 1998 (S.I. 1998/1870: “the main Regulations”). They will come into effect on 6th April 2005. The principal effects of these Regulations are (a) to allow the new stakeholder cash deposit account and stakeholder medium-term products to be held within Individual Savings Accounts (“ISAs”) from 6th April 2005, (b) to apply a “cash-like test” to stakeholder medium-term products, and policies of life insurance issued on or after 6th April 2004, to determine whether, on and from 6th April 2005, they are to be held in a stocks and shares component or cash component of an ISA, and (c) to provide for the removal of insurance components of ISAs on 6th April 2005.

Regulation 1 provides for citation, commencement and effect and regulation 2 for amendment of the main Regulations.

Regulation 6 provides for the removal of insurance components at 6th April 2005, and determines whether investments held under such components at that time become held under a stocks and shares component (where they all pass the “cash-like test” in regulation 7(15) of the main Regulations), or otherwise become held under a cash component.

Regulation 7 provides that stakeholder medium-term products, and life insurance policies issued on or after 6th April 2004, which pass the “cash-like test,” and life insurance policies issued before 6th April 2004 (and held in an ISA immediately before 6th April 2005), may be held within a stocks and shares component.

Regulation 12 provides that stakeholder cash deposit accounts, and life insurance policies issued on or after 6th April 2004 which fail the “cash-like test,” may be held within a cash component.

Regulations 3 to 5, 8 to 11, and 13 to 21 make consequential and technical amendments to the main Regulations.

Regulation 22 reduces the rate of tax which must be accounted for and paid by account managers, or is assessed on the account manager or account investor, on gains made on life insurance policies held in a void ISA, to the lower 20% “savings rate.” This aligns the rate with the rate of tax imposed on basic rate taxpayers on gains on policies held outside an ISA

A Regulatory Impact Assessment is available on the Inland Revenue website: www.inlandrevenue.gov.uk.