New rules will be introduced to stop savers trying to get around the new lower limit for cash ISAs
Rachel Reeves is introducing new rules around ISAs (Image: Getty)
A financial expert has explained the tax implications for people using stocks and shares ISAs in the wake of decisions in the November budget. Talking to The Times, Tom Selby from the investment platform AJ Bell was answering a reader’s question about the
Reader Steven asked: “Is it the case that the changes announced in the budget will mean that if you sell investments in a stocks and shares ISA, and then park the money until a new buying opportunity arrives, the cash will be subject to tax on any interest accrued? And will investments in short-term money market funds inside the stocks and shares ISA be allowed?”
New rules will be introduced to stop savers trying to get around the new lower limit for cash ISAs, according to HM Revenue and Customs (HMRC). Guidance published on its website said rules will be introduced “to avoid circumvention of the lower limit for cash Isas”.
The rules will include charges on interest paid on cash held in stocks and shares ISAs and tests to determine whether money is being held in “cash like” accounts. Currently, people can newly save up to £20,000 annually in cash Isas, stocks and shares Isas, or a mix of both.
But the Government announced in the Budget that, from April 2027, the annual adult cash ISA limit will be slashed to £12,000.
Only over-65s will retain the full £20,000 annual cash Isa allowance. The annual overall contribution limit into adult Isas will remain at £20,000, potentially encouraging some savers who reach the £12,000 cash ISA limit to put more money in stocks and shares.
Mr Selby said: “Under plans unveiled by Rachel Reeves in the budget on November 26 the cash ISA annual allowance will be reduced for those aged under 65 from £20,000 to £12,000 from April 2027. The allowance will stay at £20,000 for those investing in stocks and shares ISAs.
“The stated aim of these changes is to encourage more people to invest for the long-term, although there is scant evidence that the reforms will achieve this and there will be significant complexity for savers to deal with. HM Revenue & Customs has said that it intends to make it impossible for anyone to circumvent the changes. While we have not yet been given the full details, it has said that for under-65s it intends to:
• Ban any transfers to cash ISAs from stocks and shares and innovative finance ISAs (an ISA for less mainstream investments).
• Test whether an investment is eligible to be held in a stocks and shares ISA or is “cash-like”.
• Introduce a tax charge on any interest paid on cash held in a stocks and shares or innovative finance Isa.
“So on your first question, yes, the government’s intention is to apply a tax charge on cash held in a stocks and shares Isa, presumably from April 2027. What we don’t know yet is exactly what that will be or how it will be applied. Under previous rules, there was a 20 per cent government charge on cash held in stocks and shares ISAs, so it is possible HMRC will simply revert to those rules.
“And based on what we’ve heard so far, any cash-like investments — which will almost certainly include money market funds that allow people to invest in things like government gilts and bonds — will no longer be eligible in stocks and shares ISAs.
“HMRC has not yet published the rule changes that will be needed to implement these restrictions. It has said those changes will be laid before parliament “well ahead of April 2027”, so it’s worth keeping an eye out for clarity on exactly how this will work.
“I’m not a fan of these reforms. Having said it wanted to simplify ISAs ahead of the general election, the government has announced a package of changes that could hardly be more complicated. The good news is that ISAs are still an attractive long-term investing option, with the overall £20,000 allowance intact and any investment returns you enjoy completely tax-free.”
The guidance said rules to avoid circumvention of the lower cash limit will include no transfers from stocks and shares and Innovative Finance ISAs to cash ISAs.
There will also be tests “to determine whether an investment is eligible to be held in a stocks and shares Isa or is ‘cash like’.” Charges could also be applied on any interest paid on cash held in a stocks and shares or Innovative Finance Isa.
The rules will apply to investors under the age of 65, HMRC said. Industry will be consulted on the draft legislation, which will be made by amendments to the ISA regulations and laid before Parliament well ahead of April 2027, the guidance said.
