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Investment sites are increasingly confident the government will water down proposals to charge interest on cash held in stocks-and-shares Isas and tests on “cash-like” investments will not be as strict as they had feared.
HM Revenue & Customs said in November it would introduce rules to avoid “circumvention” of the £12,000 cash Isa limit for under-65s announced by the chancellor in the last Budget.
Proposals included a ban on transfers into cash Isas from other Isas, a test to see if an investment was too “cash-like” for a stocks-and-shares Isa, and a charge on interest paid on cash held in these vehicles.
However, during consultation with industry on the draft legislation, the government has recently shown willingness to take a lighter touch approach to the interest charge and the definition of “cash-like” investments, according to three people familiar with the discussions.
One large platform said it was “cautiously optimistic” HMRC was “receptive to going more softly, softly” by implementing a principles-based approach rather than a rules-based framework.
The industry previously warned that HMRC might apply a charge on interest as high as 20 per cent, reverting to pre-2014 rules. And investment sites and building societies have clashed at meetings with the exchequer over the definition of “cash-like” investments.
Before the current Isa regime was adopted in July 2014, “cash-like” investments — those assessed to return at least 95 per cent of their value, or that matured within five years — were deemed ineligible for stocks-and-shares Isas.
One option involves platforms voluntarily monitoring excess cash and “cash-like” investments held in Isas and “nudging” investors to switch those assets into stocks and shares instead. Platforms would not offer “excessive” rates of interest on cash held in stocks-and-shares Isas, potentially restricting advertisements too, according to a leading platform.
Michael Healy, IG Group managing director UK and Ireland, said sites already monitor cash balances and interest within Isas, which would allow them to create “proportionate rules distinguishing between transactional cash and long-term idle balances”.
Healy also pushed back on concerns expressed by other platforms that the government risked deterring investment by increasing Isa complexity.
Another investment site told the FT that the government had “shown more willingness to wait and see” and it had a sense “there could be movement” on cash-like investments and the charge on interest on cash.
Another said late last week that it was “a lot more confident [HMRC is] coming around than we were this time two weeks ago” and that the tax agency was actively looking for evidence to present to ministers.
Tom Selby, AJ Bell public policy director, warned that “a heavy handed approach to ‘anti-avoidance’ measures . . . will undermine stocks-and-shares Isas at a time the government says it wants to build a retail investment culture”.
He added that cash and cash-like investments were important for long-term investment and portfolio de-risking, and that restricting them without evidence would be a “retrograde step”.
The platforms all added that the discussions were still ongoing.
Money market funds — which invest in short-terms bonds and provide an alternative to simply holding cash — are expected to remain under government scrutiny due to concerns they are being used as a backdoor to hold cash-like investments in stocks-and-shares Isas.
The main proponents of this view outside government are building societies. They are concerned MMFs attract money that might otherwise be held in cash deposits used by lenders to fund mortgages.
A person familiar with the building societies’ position said that their concerns were “not a majority voice” in the room and that they were “quite outnumbered”.
When asked if they agreed that the proposals were likely to be watered down, they said: “I don’t think it’s the complete picture.”
However, one investment site said there was “growing recognition [from HMRC] that banning [MMFs within Isas] outright could do more harm than good for investors”.
Alex Campbell, Freetrade’s head of external affairs, said “Cash-like securities are a perfect stepping stone into investing”.
He added that “it would be a missed opportunity” to ban products such as short-term Treasury bills from stocks-and-shares Isas.
Isobel Gordon, savings policy manager at the Building Societies Association, accepted that holding cash or cash-like assets in stocks-and-shares Isas could be part of de-risking.
“However, there must be clear safeguards to ensure this does not create a workaround to the lower cash Isa limit, which could undermine the reform’s objectives and blur the distinction between products,” she added.
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.”