The government has moved to close potential loopholes in the cash ISA limit announced in last week’s Budget, blocking transfers from stocks & shares ISAs into cash ISAs and imposing a charge on interest earned on cash held within investment accounts.
Chancellor Rachel Reeves announced in the 26 November Budget that the annual cash ISA limit will fall from £20,000 to £12,000 from April 2027, though over-65s remain exempt. Bestinvest managing director Jason Hollands identified two implementation gaps that could allow savers to circumvent the new cap.
Current flexible ISA rules create one arbitrage route, as transfers between stocks & shares ISAs and cash ISAs are permitted. “Without a change to restrict this in some way or even stop it altogether, there would be nothing to stop someone opening a £12,000 cash ISA and up to £8,000 in a stocks & shares ISA on top, only to then transfer the latter into a cash ISA shortly after,” Hollands explained last week.
A second route exists through investment platform cash facilities. Savers with more than £12,000 could open a stocks & shares ISA with the excess and simply park the money in cash rather than invest it, with platforms interest on uninvested cash held within ISA accounts.
An HMRC bulletin outlined three measures designed to prevent both workarounds.
The government will block all transfers from stocks & shares ISAs and Innovative Finance ISAs into cash ISAs, introduce tests to determine whether an investment is “cash like” and levy a charge on any interest paid on cash held in a stocks & shares or Innovative Finance ISA.
Hollands said the crackdown was predictable but criticised the implementation.
“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,” he said.
“The ‘tests to determine whether eligible investments are ‘cash like’ will throw doubt about access to money market funds within Stocks & Shares ISAs and could even bring short-dated bonds into question. More uncertainty ahead,” Hollands said.
The measures will take effect from April 2027. Before the restrictions apply, savers can shelter £40,000 across the current and next tax year, using the full £20,000 annual allowance twice before the cash ISA limit falls.