Money market funds and other ‘cash-like’ investments could be subject to the incoming £12,000 cash ISA limit from 6 April 2027, limiting the ability of investors to manage their risk profiles.
Under new rules published by HMRC, ‘cash-like’ investments – which experts believe could include money market funds and similar investments like short-dated bonds – will be subject to tests to establish whether they are eligible to be held in a stocks and shares ISA or a cash ISA.
Beginner investors who are switching from exclusively cash savings towards investing by opening a stocks and shares ISA can currently use money market funds as a bridge between the two. They offer low-risk cash-like returns from within a stocks and shares ISA.
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Money market funds have also been rising in popularity and were some of the top funds purchased by DIY investors in November.
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But if speculation that money market funds or short-dated bonds would be considered cash-like, the reforms that HMRC is proposing could block new or cautious investors from using these products to manage their risk.
“Blocking money market funds within stocks and shares ISAs would be a serious setback for investors,” said Mark Burges Watson, co-founder of investing app Kaldi. “These funds are among the safest short-term investment options – low-risk, cash-like, and currently yielding over 4%, far higher than instant-access cash ISAs at high street banks.”
MoneyWeek asked HMRC for clarification over whether money market funds would be considered 'cash-like' under the new rules, and how the mechanism for enforcing the respective limits would work - a HMRC spokesperson said: "Rules will be introduced to avoid circumvention of the lower limit for cash ISAs, including tests to determine whether an investment is eligible to be held in a stocks and shares or innovative finance ISA, or is ‘cash like’.
"Whether an investment will qualify for inclusion within an ISA will depend on whether it complies with the rules. The detail of the changes to the rules will be publicised in advance of the change, and following discussions with stakeholders."
The new HMRC rules will also ban transfers from stocks and shares to cash ISAs, as well as implementing a charge on any interest paid on cash holdings within a stocks and shares or Innovative Finance ISA.
Why are investors using money market funds?
Under the current rules, money market funds can be held in a stocks and shares ISA. That means they would theoretically circumvent the upcoming reduction in the annual cash ISA limit to £12,000, which will affect people under the age of 65.
“With the cash ISA allowance cut to £12,000, millions of savers will be forced into taxable accounts for their excess savings,” said Burges Watson. “Money market funds serve as an ideal stepping stone, letting savers park money securely while deciding how to invest or managing short-term market volatility.”
If money market funds were to remain eligible for stocks and shares ISA inclusion (or would otherwise be exempt from the ‘cash-like investment’ restrictions) then savers could theoretically deposit £12,000 annually in a cash ISA and put the remaining £8,000 into money market funds in a stocks and shares ISA – utilising their entire £20,000 ISA allowance but keeping it in low-risk, cash-like investments.
Burges Watson added that restricting access to lower-risk products “undermines the very purpose of ISAs: supporting safe, flexible investment”.
Volatility within the market is a particular concern for many investors, with stretched stock market valuations prompting fears of an AI-driven bubble.
“Record high markets have… served to foster an appetite for lower risk investments such as money market funds and short duration bonds,” said Ryan Hughes, managing director at AJ Bell Investments.
Assets invested in the Money Market model portfolio service (MPS) on AJ Bell’s advised platform tripled in the 12 months to November. The MPS, which is only available to AJ Bell's advised clients, invests in cash, as well as cash alternatives including money market funds and ultra-short-dated bonds.
How would HMRC restrict access to money market funds?
It isn’t clear yet how a potential rule change would be implemented. HMRC's website says that the industry will be consulted on the draft legislation to amend ISA regulations, and that this legislation will appear before Parliament "well ahead" of the April 2027 rule change.
HMRC's statement in response to MoneyWeek's question about enforcement indicates that cash-like investments will likely be excluded from stocks and shares ISA eligibility.
But whatever happens, implementing the block could add further complexity to an ISA system which critics warn is already becoming confusing for beginner investors.
The nature of money market funds may also prohibit HMRC from changing their designation.
“HMRC could have a tough time enforcing these restrictions, as money market funds are classified as investments, carry a ‘Capital At Risk’ warning and are not covered by the FSCS,” said Burges Watson.
