HMRC will stop cash-like investments in S&S ISAs

MiserlyMartin

Hi all, while there is massive uncertainty through such a lack of detail until more is announced, we still have to today, before the end of this tax year in and next tax year  - make a decision on how to fund our ISAs soon!
Do we max out our Cash ISAs with £20k while we still can? (Safest option?)
Or do we max out a Stocks & Shares (S&S) ISA? (See below)
I currently like S&S ISAs as they stand. I would happily put the full £20k in them and not worry about having to invest all at once at the top of the market, because we can put money in MMFs or leave it as uninvested cash on the ISA platform, earning interest by default anyway. Investing this way is straightforward and low-stress.
But under the Treasury rules proposed for 2027:
QMMFs may be taxed inside S&S ISAs or banned from them entirely.
Interest on uninvested cash (on certain platforms) may also be banned or taxed.
Without the ability to hold return generating cash — or low risk instruments — inside S&S ISAs, many of us, including myself, will no longer want to use them.
It seems almost certain that after 2027, you will not be able to transfer S&S ISAs to Cash ISAs. For anyone concerned, the prudent course of action is to sell S&S ISA holdings into cash now and transfer to Cash ISAs while it is still possible.
What about maxing out a S&S ISA now to get as much 'pre-2027 ISA money' as you want in MMFs to suit your investing requirements? The theory being is that only “new” (post-2027) S&S QMMFs or cash-like holdings would be taxed or forced to be sold. But assuming this is risky — Treasury rules could require you to sell all such holdings after 2027.
If that happens, the only way for the funds to earn anything would be to invest it in equities, ETFs, or other higher-risk instruments — potentially at a stage in life when you do not want that risk. In that case, the other option would be to withdraw the money entirely, losing the tax-free benefits. This is why it will be so important to get these S&S ISAs over into Cash ISAs while it is still possible.

Today, under current rules: I would put the full £20k into S&S ISAs. If the proposed changes are confirmed, after 2027, I would instead put £12k into Cash ISAs and avoid taking any risk inside a S&S ISA.  As it stands, before 2027, I plan to transfer all of my S&S ISA holdings into a Cash ISA while it is still possible, since I cannot — as I get older — afford for this money to remain in a risky or potentially taxable ISA going forward into my later years.

Those in charge are trying to force us to invest more but achieving the complete opposite. They are also over-reaching, interfering with peoples choice and speed of investing within their ISAs. I hope that they rethink, but there doesn't seem to be much coverage of this in the media or public outcry.

What is everyone else going to do by April?

dunstonh

What is everyone else going to do by April?

Nothing.

Until the rules are known there is no need.

Sea_Shell

dunstonh said:

What is everyone else going to do by April?

Nothing.

Until the rules are known there is no need.

I wonder how much notice we will have of the new rules, specifically, and how this will all work in reality.

I'm assuming from your post that they haven't been published yet.

masonic

Sea_Shell said:

I'm assuming from your post that they haven't been published yet.

The consultation hasn't even started yet.

In response to the earlier post about what to do, if you have a minimum you tend to keep in STMMF, then you can already get a competitive return in a cash ISA, so there's little reason not to partially transfer out if you can. Beyond that, things are unlikely to be worse than they were in the old days of lower limits for cash, where you could buy 5 year duration fixed interest and hold to maturity.

A 5 year gilt pays a guaranteed return of 3.95% if held to maturity, and a 5 year index linked gilt pays around RPI+0.8%. What's not to like about that?

phlebas192

MiserlyMartin said:

What is everyone else going to do by April?

Nothing. We got along just fine back when ISAs were more restrictive and we'll manage just as well if they go back to a similar regime. 

Tony.m2019

Are we assuming (for now) that the 2027 block on S&S to Cash ISA applies to all existing ISA savings as well and not just any made after the deadline? 

dunstonh

Tony.m2019 said:

Are we assuming (for now) that the 2027 block on S&S to Cash ISA applies to all existing ISA savings as well and not just any made after the deadline? 

Everything written so far indicates it applies to existing and future but the consultation outcome will  confirm it all.

m_c_s

Leaks are starting to appear from initial talks with ISA providers: 

https://www.politico.eu/article/hmrc-to-charge-isa-savers-22-percent-on-cash-interest-under-new-plans/

1. Current view from Government is a 22% flat-rate charge on any interest from cash holdings held in stocks and shares ISAs.
2. HMRC is also considering aligning the charge with income tax bands so could be a little more painful for those in higher rate tax bands.
3. “carve-outs” possible e.g. for cash waiting to be invested.

So it looks like the Government may not actually ban cash in S&S ISAs but rather there will be a sting if you do hold cash like investments.
Still early days but industry also stating the obvious that this is a tax grab in disguise.

MeteredOut

m_c_s said:

Leaks are starting to appear from initial talks with ISA providers: 

https://www.politico.eu/article/hmrc-to-charge-isa-savers-22-percent-on-cash-interest-under-new-plans/

1. Current view from Government is a 22% flat-rate charge on any interest from cash holdings held in stocks and shares ISAs.
2. HMRC is also considering aligning the charge with income tax bands so could be a little more painful for those in higher rate tax bands.
3. “carve-outs” possible e.g. for cash waiting to be invested.

So it looks like the Government may not actually ban cash in S&S ISAs but rather there will be a sting if you do hold cash like investments.
Still early days but industry also stating the obvious that this is a tax grab in disguise.

No big surprise here. Many of us surmised the result would be taxation of interest cash-like assets in S&S.

But I think it would be grossly unfair if it was a flat rate and any such interest did not get relief under the £1K interest free savings and the £5K Starter Rate For Savings (where applicable).

It would just make it simple to report interest on cash-like savings in S&S ISAs as per non-ISA accounts and people pay tax at their marginal rate as they do today for non-ISA accounts. That would be my bet on where we land, but with a grace period of, say, 30 days, for cash waiting to be investmented.

zagfles

MeteredOut said:

m_c_s said:

Leaks are starting to appear from initial talks with ISA providers: 

https://www.politico.eu/article/hmrc-to-charge-isa-savers-22-percent-on-cash-interest-under-new-plans/

1. Current view from Government is a 22% flat-rate charge on any interest from cash holdings held in stocks and shares ISAs.
2. HMRC is also considering aligning the charge with income tax bands so could be a little more painful for those in higher rate tax bands.
3. “carve-outs” possible e.g. for cash waiting to be invested.

So it looks like the Government may not actually ban cash in S&S ISAs but rather there will be a sting if you do hold cash like investments.
Still early days but industry also stating the obvious that this is a tax grab in disguise.

No big surprise here. Many of us surmised the result would be taxation of interest cash-like assets in S&S.

But I think it would be grossly unfair if it was a flat rate and any such interest did not get relief under the £1K interest free savings and the £5K Starter Rate For Savings (where applicable).

It would just make it simple to report interest on cash-like savings in S&S ISAs as per non-ISA accounts and people pay tax at their marginal rate as they do today for non-ISA accounts. That would be my bet on where we land, but with a grace period of, say, 30 days, for cash waiting to be investmented.

The article does say "cash" not "cash-like". It would be ridiculous if people who'd say built a gilts ladder or used MM funds in a S&S ISA (because you can't buy them in cash ISAs) and who perhaps haven't used the cash ISA allowance at all, or maybe had only used £12k of it, were taxed on interest earned in a S&S ISA from investments that can't even be held in a cash ISA.