Introduction to ISA Reforms

The boss of one of Britain’s biggest retail investment platforms, AJ Bell, has warned that Rachel Reeves’ plans to curb cash ISA limits to spur a wave of stock market investment "are doomed to fail". Michael Summersgill, chief executive of AJ Bell, which manages more than £100bn of client assets, wrote to the Chancellor to express his concerns about the proposed reforms.

Concerns About the Reforms

Mr. Summersgill expressed concern not only about the plan to cut the ISA’s cash allowance from £20,000 to £12,000 in 2027 but also about the "lack of due process to implement the proposed changes". He believes that these proposals will not encourage more people to invest for the long term and represent a significant step backwards for a product whose success is largely due to its relative simplicity.

Impact on Investors

The investment industry has loudly warned that the rule changes will add complexity and disadvantage savers who are focused on de-risking their portfolios before they turn 65. There are also concerns that a stricter approach to taxing cash holdings in stocks and shares ISAs would significantly damage the image of ISAs as a tax-free investment option.

AJ Bell’s Survey

A survey conducted by AJ Bell found that the vast majority of investors would simply opt for cash alternatives such as NS&I bonds or save in a taxable cash account if the ISA cash allowances are cut. Mr. Summersgill warned that this would tighten the boundary between cash ISAs and stocks ISAs, making it less likely that existing excess funds held in cash ISAs will be shifted into long-term investments via stocks and shares ISAs.

Criticism of Anti-Avoidance Measures

Mr. Summersgill criticized the decision to exclude people aged 65 and over from the changes, saying the choice of this age was "confusing" as it did not correspond to the state pension age. He also warned that the anti-avoidance measures that HMRC will need to develop to accompany these reforms risk further undermining the attractiveness of ISAs.

Tax Burden on Cash Held in Stocks and Shares ISAs

The proposed transfer ban limits choice and flexibility, two key benefits of ISAs, but even more worrying is the intention to impose a tax burden on cash held in stocks and shares ISAs. Mr. Summersgill warned that this could potentially mean that stocks and shares ISAs, which allow people to hold cash, can no longer be marketed as ‘tax-free’, weakening the appeal of the most popular investment account in the UK market.

Call for a Light Approach

Mr. Summersgill called on the Chancellor to “take a light approach to tackling tax avoidance, at least until the reforms are implemented and there is an evidence-based basis for formulating any necessary interventions”. He suggested that any cash held for investment purposes in a stocks and shares ISA should remain exempt from any charge, with HMRC reserving the right to charge a charge if this is not the case.

Conclusion

The boss of AJ Bell added that plans to replace the Lifetime ISA with a savings product for first-time buyers only risked “making the ISA landscape even more complex”. He said the nature of the Treasury’s consultation on the scope of ISA reforms "with only a few months to work on the fundamentals with HMRC means unintended consequences are far more likely". In the 2023/24 tax year, savers put a record £103 billion into ISAs, with almost exactly two thirds of that – £70 billion – invested in cash ISAs.