It is currently unknown how HMRC will determine whether an investment is “cash-like”, although the tax authority has confirmed in its savings newsletter that a “test” will be developed in consultation with the financial industry.
It raises concerns that investments such as money market funds may be effectively banned from stocks and shares Isas. These funds, which aim to offer a slightly higher return than cash at low risk, are often used by investors who are seeking new opportunities to buy stocks.
There is a risk that even short-dated bonds might be penalised by the taxman, which includes UK government debt and the most stable company debt across the FTSE 100, as these are often referred to as “cash-like” investments for their low risk.
The move comes in the wake of changes made in Rachel Reeves’s Budget, which will create a two-tiered Isa system based on cash allowances.
Savers under the age of 65 will be limited to a £12,000 per year allowance for their cash Isa or face punishment, while savers aged 65 and over will retain their full £20,000 allowance.
Jason Hollands, of stockbroker Bestinvest, said the move amounted to “yet another stealth tax”.
He said: “While it is no surprise they are going to take action, 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. More uncertainty ahead.”
Brian Byrnes, of savings provider Moneybox said: “Isas are popular among UK savers because they’re known for being simple and reliable.
“Any change needs to preserve that simplicity and avoid any additional complexity which will only lead to confusion.”
Mr Byrnes added: “Charging interest on ‘cash-like’ holdings inside a stocks & shares ISA begs the question: can this still be labelled as ‘tax-free’ growth?”
A Government spokesperson said: “We will introduce rules to avoid circumvention of the new cash limits on Isas and will consult with Isa industry stakeholders before doing so.”
