Investment platforms and building societies clash over new Isa rules

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Investment sites and building societies are clashing over whether money market funds should be allowed to be held within stocks-and-shares individual savings accounts (Isas) when new rules come into force next year.

The government overhauled the UK’s Isa regime in the Budget in November by reducing the annual amount that can be put into cash Isas to £12,000, from £20,000, for savers under 65 from April 2027.

To stop individuals avoiding the new limit by holding cash in stocks-and-shares Isas, HMRC will introduce certain rules. These will include a test to see if an investment is too “cash-like” to be eligible for a stocks-and-shares Isa.

But the two arms of the financial services industry are at loggerheads over whether money market funds, which invest in short-term bonds and serve as an alternative to cash but with slightly higher returns, should be eligible.

At a recent meeting with the Treasury, investment sites argued money market funds should be permitted, since they provide many savers with their first experience of investing, according to three people with knowledge of the meeting.

However, representatives of building societies supported the exclusion of money market funds, as these attract money that might otherwise be held in the cash deposits used by lenders to fund mortgages.

The debate is heating up as the government consults with the industry on draft legislation, due to be laid before Parliament before April 2027.

Tom Selby, director of public policy at investment site AJ Bell, said: “A heavy handed approach to anti-avoidance measures accompanying the cash Isa allowance cut risks fundamentally undermining the government’s drive to boost retail investing through stocks-and-shares Isas.

“Money market funds and other low-risk investments are central parts of Isa investors’ portfolio construction, particularly in relation to derisking, while they are also potentially an attractive first option for new, less confident investors.”

In view of the “lack of evidence” that people would try to circumvent the cut, he added: “HM Revenue & Customs should aim for the simplest, least disruptive set of measures possible.”

Andrew Gall, head of savings and economics at the Building Societies Association, said: “We recognise that for many holding cash and ‘cash-like’ investments in stocks-and-shares Isas will be appropriate and should remain an option for them.

“However, we want to ensure that safeguards are in place to restrict or disincentivise this being used as a way to get around the lower cash Isa limit.”

The BSA had met with HMRC, he added, and would work with the government “to ensure that the policy is implemented in a way which works for consumers”.

Many smaller building societies use cash Isas as one of their main sources of funding for mortgages. The BSA warned last year that cutting the cash Isa allowance could lead to 60,000 fewer home loans a year.

The government said: “To encourage greater investment in stocks and shares, we’re developing changes to Isa rules which will prevent circumvention of the new lower cash Isa limit.
 
“We’re already working closely with industry and will publish clear guidance before the changes come into effect.”

Savers ploughed £69.5bn into cash Isas in the 2023-24 year — the latest for which data is available — up 67 per cent on the previous year, as high rates of interest set by the Bank of England led providers to offer attractive savings deals. Less than half of this sum, £31bn, went into stocks-and-shares Isas, though this was up 11 per cent on the previous year.