Reeves’ new 22 per cent tax – and the ‘loophole’ to get around it | Personal Finance | Finance
A financial expert has explained a loophole which can potentially avoid a new 22 per cent tax imposed by the Government. It revolves around the new £12,000 limit on Cash ISAs, and the new 22 per cent tax announced on interest made on cash held in Stocks & Shares ISAs.
Chancellor of the Exchequer Rachel Reeves confirmed in last year’s budget that the Cash ISA limit would be lowered to £12,000 a year for people under 65 in an attempt to have more Brits investing. However, there were immediate fears that people would instead simply use the £20,000 limit of the Stocks & Shares ISA without actually investing the money.
After weeks of rumours, HMRC confirmed earlier this week that there will be a 22 per cent ‘charge’ on interest paid on cash held in non-Cash ISAs, including the Stocks & Shares ISA. The explanation also includes the line, ‘Non Cash ISA portfolios made up of 100% cash-like assets will be non-qualifying investments’.
Andreea Ion, who gives help and tips on social media and her podcast thanks to her experience of having worked in finance, explained why this single line is significant, and how it presents a workaround.
She said: “HMRC is set to charge a 22% tax on interest from cash inside a stocks and shares ISA. And I know that sounds confusing, so here’s how this happened and how you might avoid it in 60 seconds.
“Rachel Reeves cut the Cash ISA allowance from £20,000 to £12,000 for under-65s. She said it’s to get more Brits to invest instead. But people quickly spotted a loophole. They could put the extra money into a Stocks and Shares ISA and just leave it as cash, because most investment providers still pay interest on uninvested cash.
“So the government is trying to close that loophole by taxing that interest at 22 per cent. But, there’s another loophole. There are super low-risk investments called money market funds that give similar returns to cash. So instead of keeping your money as cash, you could put it in one of those instead.
“Now, HMRC has also said that you can’t have 100% of your money in money market funds. That means that people could put most of their money in a money market fund, and a tiny amount in something like a global ETF or a stock. And that would comply with the rules as it stands.
“I don’t necessarily think that you should do that because investing is still a great way to build wealth over the long run. But, I also don’t like what HMRC are doing. So yeah, take that as you will.”
The announcement, made on Tuesday (June 23), also included a promise a new first-time buyer account with no upper age limit to replace the Lifetime ISA.
