INDIVIDUAL SAVINGS ACCOUNT CHANGES CONFIRMED

After months of uncertainty surrounding Cash and Lifetime ISAs, and lots of speculation about what the government’s proposed ‘ISA reforms’ would be like, the Budget has now confirmed some key changes. 

Whilst the changes are relatively straightforward, they will introduce additional unwanted complexity to the ISA landscape, undoing much of the previous government’s work to align cash and stocks and shares ISAs and removing the benefits that were introduced as part of the “New ISA” reforms in 2014.

The headline change was the annual subscription limit for cash ISAs, which will be reduced from £20,000 to £12,000 from April 2027, with any balance available for use with another type of ISA (up to the relevant/maximum annual subscription amount).  Note, however, this restriction applies only to clients under age 65 – those 65 or over can still invest the full £20,000 in a cash ISA.

Of course, if this were the only change, the rules could be easily circumvented.  For example, clients could pay £20,000 into a stocks and shares ISA and either leave it held as cash in the stocks and shares ISA or transfer it to a cash ISA.

To head this off, HMRC have advised in their November Tax Free Savings Newsletter that additional rules will be introduced for the stocks and shares ISA. These “new” rules will only apply to individuals age under 65 and they will:

1. Prevent transfers from stocks and shares ISAs and innovative finance ISAs to cash ISAs.
2. Introduce tests to determine whether an investment is eligible to be held in a stock and shares ISA or whether they are ‘cash-like’ and therefore ineligible.
3. Place a charge on any interest paid on cash held in a stocks and shares ISA or Innovative Finance ISA. The rate of the charge has not been disclosed but given that the changes are planned for April 2027, it could be aligned to the basic rate for savings income.

Clearly these changes to the stocks and shares ISA are very unwelcome and introduce considerable levels of complexity. Younger clients (those under age 65 when the changes come into effect) holding cash or near cash in a stocks and shares ISA might want to consider their options, including a possible transfer of cash and near cash investments to a cash ISA, ahead the rule changes.

The second major announcement was that there will be a consultation about the Lifetime ISA being replaced with a simpler ISA designed to help first-time buyers, that will pay a bonus at the point of purchase, removing the need for early withdrawal charges (perhaps it could be called something like a ‘help to buy’ ISA?). We would expect the consultation to also set out the proposed treatment for existing LISA holders who are not planning or not eligible to use their LISA for a first home purchase.

Whilst there is much that could have been done to improve the current ISA landscape these reforms look like a significant retrograde step, leading to increased complexity and administrative costs. There will be a consultation period to provide feedback on the draft regulations, but not on the policy, making a change in direction seem unlikely.

If you have any questions, please feel free to contact the Technical Services team.

All information is based on our understanding and interpretation of applicable law and regulation which is subject to change.