Investors hoping they could dodge the new cash ISA limits may be disappointed.
- HMRC confirmed that there would be tests to determine whether an investment is ‘cash like’
- There will be a charge on any interest paid on cash held in a stocks and shares ISA
- The move is being seen as a ‘stealth tax’ on savers
HMRC has clarified the position on Cash ISAs this week, making it more difficult to circumvent the rules. In particular, it confirmed that there would be tests to determine whether an investment is eligible to be held in a stocks and shares ISA or is ‘cash like’. That is likely to rule out money market funds, which had been touted as an option for risk-averse investors.
HMRC also said that there could be no transfers from stocks and shares and Innovative Finance ISAs to cash ISAs and there will be a charge on any interest paid on cash held in a stocks and shares or Innovative Finance ISA, This means investors will need to pay to ‘park’ money in an ISA while they wait to decide where to invest it.
This has drawn ire from the financial advice industry. Jason Hollands, managing director of Bestinvest, says: “While it is no surprise they are going to take action – as we predicted this – levying a charge on cash held within Stocks & Shares ISAs is yet another stealth tax that will impact genuine investors who sometimes decide to park money in cash for a period of time awaiting investment, or because they are nervous about the market environment.”
The encouragement to invest in stocks and shares ISAs rather than cash comes at a tricky moment. Investors have seen three years of double-digit returns from stock markets and a fourth year of gains would be unprecedented in recent history. The Chancellor may be drawing people out of their cosy cash savings at a perilous moment in markets.
Nevertheless, there are still options for investors nervous about markets. Short-duration bond funds have been a good choice in recent years, protecting capital during the sell-off in 2022, but still making decent returns in good years. It is not clear whether T-bills will be caught by the ‘cash like’ definition, but, if not, these would also be an alternative option as long as investors are happy to lock in their money to maturity. Low risk multi-asset funds have also proved their worth.
If they encourage people to take more risk, the restrictions on cash ISAs could leave them better off. £12,000 is still a lot to be putting into cash every year. The danger is that people simply pay into a standard tax-bearing savings account. Rachel Reeves would be happy, because it would boost the Government’s coffers, but it would be a backward step for individuals’ wealth.
