Government plans to tax ‘cash like’ products held in stocks and shares ISAs as part of its cap on cash ISAs have been criticised by financial experts as “ill-conceived”, “bullying” and an example of the “government deciding it knows your money better than you do”.
In the Budget, Chancellor Rachel Reeves announced that, from 6 April 2027, the annual limit for a cash ISA will be set at £12,000 for investors under the age of 65.
For investors aged 65 and over, the annual subscription limit for a cash ISA will remain at £20,000.
Now, HMRC has followed up with details of rules that will also be introduced to stop people under 65 finding a way around the lower limit for cash ISAs.
These new rules include no transfers from stocks and shares and Innovative Finance ISAs to cash ISAs, as well as tests to determine whether an investment is eligible to be held in a stocks and shares ISA or is ‘cash like’ and so not allowed.
Crucially there will be a charge on any interest paid on cash held in a stocks and shares or Innovative Finance ISA.
Govt bullying people with ISAs
Rob Mansfield, Independent Financial Adviser at Tonbridge-based Rootes Wealth Management said: “This is a classic example of a sledgehammer being used to crack a walnut.
“The government is attempting to bully people into investing rather than educating them on its merits and letting people decide what’s right for them. It’s created loopholes, which this measure looks to close.”
Ross Lacey, Director & Independent Financial Adviser at Rayleigh-based Fairview Financial Management added: “This is another hair-brained way to raise tax revenue, which will be complicated and expensive to administer.”
Philly Ponniah, Chartered Wealth Manager at Philly Financial, pointed out even the Financial Conduct Authority recommends cash for any money needed within five years.
She said: “I’m pro-investment, but cash has a clear role for short-term goals, house moves and financial safety. It makes no sense to punish people for keeping money safe during these periods.
“Savers should be able to hold cash inside an ISA without facing a charge, at least for a reasonable window. An ISA is meant to support good financial decisions, not force people into risk when stability is the right choice.”
“We do not have savvy politicians”
David Belle, Founder and Trader at Fink Money, said: “What a savvy politician would do is take £8,000 from the cash ISA allowance and add it onto the stocks and shares ISA allowance, if incentive changes were the actual goal.”
He added: “But of course, we do not have savvy politicians. We have remedial politicians in charge, who do not understand incentives and so all we have now is a distorted system that doesn’t apply any real benefit.”
Antonia Medlicott, Founder & MD at London-based Investing Insiders, said she finds it very hard to see how taxing cash in stocks and shares ISAs will work in practice.
She said: “People keep uninvested cash for many different and legitimate reasons. What if I decide to sell one of my stocks or funds, but haven’t yet identified another investment opportunity? Is the government going to tell me there is a deadline by which time I must either invest my cash again or withdraw it?
“What if my ISA isn’t a flexible ISA? Having to withdraw cash will have an impact on my annual allowance. And what about those long-term investors who only check their accounts once or twice a year?
“Will they be penalised for inadvertently accumulating cash from dividend payments? That would be grossly unfair. There are so many unanswered questions at present.”
“Tax grabbing, pure and simple”
Scott Gallacher, Director at Leicester-based Rowley Turton, said avoiding interest on ISA platforms was “almost impossible” so to tax investors because their investment ISA holds some cash is “simply a tax grabbing matter, pure and simple”.
He added that sensible legislation to ignore interest of, say, less than 0.5% per annum, would be much fairer and more proportionate.
Daniel Wiltshire, Actuary & IFA at Bradford-on-Avon-based Wiltshire Wealth, worries many people will scrap saving and investing altogether: “These ill-conceived cash ISA rules raise many questions and may not survive contact with reality.
“More likely, an unintended consequence is that many ordinary people will decide it’s all too confusing and not bother saving at all.”
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