HM Revenue & Customs (HMRC) is preparing a significant clampdown on savers attempting to bypass a major reduction in the tax-free allowance for cash Individual Savings Accounts (ISAs).
New Rules to Block Allowance Circumvention
Official guidance confirms that from April 2027, the tax authority will implement a series of measures designed to stop savers from dodging the lower limit. This follows Chancellor Rachel Reeves's confirmation that the annual allowance for cash ISAs will be cut from £20,000 to £12,000 for individuals under 65.
The core strategy involves closing a potential loophole where savers might move funds between different ISA types. Transfers from Stocks and Shares ISAs and Innovative Finance ISAs into Cash ISAs will be prohibited to prevent circumvention of the new cash threshold.
Scrutiny on 'Cash-Like' Investments and Potential Levies
HMRC will also conduct assessments to determine if an investment held within a Stocks and Shares ISA is essentially 'cash-like'. This move has raised concerns about the status of money market funds and short-dated bonds within these wrappers.
More notably, the guidance states that levies may be imposed on interest earned from cash deposits held within a Stocks and Shares or Innovative Finance ISA. This is a direct attempt to discourage using these accounts as a shelter for large cash balances.
Investment Experts Warn of 'Stealth Tax' and Unanswered Questions
Jason Hollands, Managing Director of Bestinvest by Evelyn Partners, has voiced serious concerns about the practical implications. He labelled the potential charge on cash within investment ISAs as 'yet another stealth tax' that could hurt genuine investors.
'This will impact investors who sometimes park money in cash awaiting a market opportunity or because they are nervous about the environment,' Hollands stated. He also warned that if charges are levied on ISA managers based on total client cash balances, the cost would likely be passed on to customers as an account fee.
Hollands highlighted that many questions remain unanswered about how the regulations will function in practice, particularly regarding the assessment of 'cash-like' investments. The financial industry is now awaiting further detailed guidance from HMRC as the 2027 implementation date approaches.
