Money market funds and other ‘cash-like’ investments could be subject to the incoming £12,000 cash ISA limit from 6 April 2027, limiting the ability of investors to manage their risk profiles.
Under new rules published by HMRC, ‘cash-like’ investments – which experts believe could include money market funds and similar investments like short-dated bonds – will be subject to tests to establish whether they are eligible to be held in a stocks and shares ISA or a cash ISA.
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Why are investors using money market funds?
Under the current rules, money market funds can be held in a stocks and shares ISA. That means they would theoretically circumvent the upcoming reduction in the annual cash ISA limit to £12,000, which will affect people under the age of 65.
“With the cash ISA allowance cut to £12,000, millions of savers will be forced into taxable accounts for their excess savings,” said Burges Watson. “Money market funds serve as an ideal stepping stone, letting savers park money securely while deciding how to invest or managing short-term market volatility.”
If money market funds were to remain eligible for stocks and shares ISA inclusion (or would otherwise be exempt from the ‘cash-like investment’ restrictions) then savers could theoretically deposit £12,000 annually in a cash ISA and put the remaining £8,000 into money market funds in a stocks and shares ISA – utilising their entire £20,000 ISA allowance but keeping it in low-risk, cash-like investments.
Burges Watson added that restricting access to lower-risk products “undermines the very purpose of ISAs: supporting safe, flexible investment”.
Volatility within the market is a particular concern for many investors, with stretched stock market valuations prompting fears of an AI-driven bubble.
“Record high markets have… served to foster an appetite for lower risk investments such as money market funds and short duration bonds,” said Ryan Hughes, managing director at AJ Bell Investments.
Assets invested in the Money Market model portfolio service (MPS) on AJ Bell’s advised platform tripled in the 12 months to November. The MPS, which is only available to AJ Bell’s advised clients, invests in cash, as well as cash alternatives including money market funds and ultra-short-dated bonds.
How would HMRC restrict access to money market funds?
It isn’t clear yet how a potential rule change would be implemented. HMRC’s website says that the industry will be consulted on the draft legislation to amend ISA regulations, and that this legislation will appear before Parliament “well ahead” of the April 2027 rule change.
HMRC’s statement in response to MoneyWeek’s question about enforcement indicates that cash-like investments will likely be excluded from stocks and shares ISA eligibility.
But whatever happens, implementing the block could add further complexity to an ISA system which critics warn is already becoming confusing for beginner investors.
The nature of money market funds may also prohibit HMRC from changing their designation.
“HMRC could have a tough time enforcing these restrictions, as money market funds are classified as investments, carry a ‘Capital At Risk’ warning and are not covered by the FSCS,” said Burges Watson.