Investors will no longer be able to transfer stocks and shares ISA money to cash equivalents under the government’s controversial reforms.
Chancellor Rachel Reeves announced plans in her Autumn Budget to cut the cash ISA allowance for under-65s to £12,000 from April 2027.
The aim is to encourage more people to use their £20,000 ISA allowance to invest in stocks and shares and there are estimates that those leaving money in traditional savings accounts could face paying thousands of pounds extra in tax.
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HMRC has now announced more restrictions to incentivise savers towards stocks and shares ISAs.
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Transfers from stocks and shares ISAs to cash ISAs will also be banned as part of the changes.
Plus, there will be a charge for those earning interest on cash within a stocks and shares ISA.
This will provide a disincentive for investors to keep cash holdings in a stocks and shares ISA for too long and instead encourage them to put it back into the market.
What are the new ISA transfer rules?
Transfers have been allowed between stocks and shares ISAs and cash ISAs since 2008.
This provided flexibility for people whose strategies and risk appetite may change.
But the system will change again once the cash ISA allowance is cut in April 2027.
An update from HMRC said transfers from stocks and shares and Innovative Finance ISAs to cash ISAs will no longer be allowed.
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.’
Plus, the government looks set to stop people parking cash in a stocks and shares ISA through a platform, where interest rates have been high in recent years.
Currently, cash holdings held in a stocks and shares ISA, often from investment returns or uninvested money, may earn an interest rate while an investor decides how to use the money.
HMRC said it will introduce a charge on any interest paid on cash held in a stocks and shares or Innovative Finance ISA, creating a disincentive to keep hold of cash in the tax wrapper for too long.
These rules, subject to consultation and new legislation, will apply to investors under the age of 65.
Critics may describe this as yet another stealth tax by the government.
Jason Hollands, managing director of Bestinvest, said: “While it is no surprise they are going to take action – as we predicted this - levying a charge on cash held within stocks and 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 ‘tests to determine whether eligible investments are ‘cash like’ will throw doubt about access to money market funds within Stocks and shares ISAs and could even bring short-dated bonds into question.
“There is more uncertainty ahead.”
Lifetime ISA changes
HMRC has also given more clues about changes to the Lifetime ISA, that got a short mention in the Autumn Budget document.
The taxman’s alert said: “The government will consult on introducing a new, first time buyer only product that will provide the bonus when a person uses it to buy a house, removing the need for a withdrawal charge and giving savers flexibility in case their circumstances change.”
This may appease those who have complained about withdrawal penalties and makes the produce similar to the now defunct Help to Buy ISA.
