Grant Blakey, Technical Team Leader at AJ Bell, explores the detail behind HMRC’s new ISA anti-circumvention rules, effective from 6 April 2027.
The headline measure from Autumn Budget 2025 was relatively simple: from 6 April 2027, the Cash ISA allowance for under-65s reduces to £12,000, while the overall ISA subscription limit remains unchanged at £20,000.
The more substantive development, however, is the accompanying package of anti-circumvention rules, designed to prevent the effective recreation of a full £20,000 cash allowance within non-Cash ISAs.
HMRC has been explicit about the behaviours it is targeting. Without intervention, savers could subscribe £20,000 into a Stocks and Shares or Innovative Finance ISA (non-Cash ISAs) and hold it in cash, before transferring to a Cash ISA, or replicate cash exposure via wholly cash-like investments.
The new rules are structured to address each of these routes.
The first measure is a flat-rate charge. From April 2027, interest or alternative finance returns generated on cash held within a non-Cash ISA will be subject to a 22% charge.
The rate is fixed and does not align with an individual’s marginal income tax position. Its purpose is to disincentivise the use of non-Cash ISAs for cash retention over the longer term.
The second measure focuses on cash-like assets. Where an ISA is invested entirely in cash-like holdings, it will be treated as containing non-qualifying investments.
Cash-like assets are currently defined as money market funds (MMFs), which invest in short-term, highly liquid debt instruments. Partial allocations remain permissible, but a fully cash-like portfolio will breach the rules.
ISA managers will be expected to identify such cases, facilitate corrective action, and report MMF holdings via existing end-of-year returns.
The third measure introduces a restriction on transfers. Transfers from non-Cash ISAs into Cash ISAs will no longer be permitted, although transfers in the opposite direction will remain allowed.
This removes the ability to access the full £20,000 allowance via a non-Cash ISA before subsequently moving funds into cash.
The interaction between the first two measures is worth noting. The 22% charge applies specifically to cash holdings, whereas the “100% rule” applies to MMFs as cash substitutes.
The two are complementary but operate independently: MMF returns are not subject to the charge, but a fully MMF-based portfolio will still fail the qualifying investment test.
Most mainstream ISA investments are unaffected. Equities, collective funds, investment trusts, ETFs and bonds, including gilts, are not considered cash-like.
The rules are targeted at cash and near-cash exposure rather than investment assets more broadly.
From the start of the tax year in which an individual turns 65, the Cash ISA limit reverts back to £20,000 and the transfer restriction is removed.
However, the 22% charge on cash held within non-Cash ISAs and the prohibition on wholly cash-like portfolios continue to apply.
From a technical standpoint, these changes alter several underlying dynamics of ISA planning. The flat-rate charge creates a disconnect between the tax treatment of cash inside and outside the ISA wrapper, with outcomes no longer aligned to an individual’s marginal rate and more dependent on factors such as the Personal Savings Allowance.
The restriction on transfers reduces post-subscription flexibility, removing the ability to move funds back into a Cash ISA for liquidity or short-term repositioning.
The treatment of MMFs introduces an additional monitoring requirement. Portfolios heavily reliant on money market funds, whether by design or through platform cash management, may reach the point of being fully cash-like, triggering non-qualifying status.
Draft legislation is expected shortly, with consultation to follow and regulations anticipated ahead of April 2027.
While detail may evolve, the policy direction is clear: to reinforce the distinction between cash savings and investment within the ISA regime.
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