1p ISA loophole that could help savers sidestep new HMRC tax rules

Under plans announced by HMRC, interest earned on cash held within Stocks & Shares ISAs could face a 22% tax from April 2027, aligning it with standard savings interest rates.

But reports suggest investors may be able to bypass the proposed tax by investing a token amount into qualifying shares while keeping the rest of their portfolio in money market funds or overnight-rate ETFs – investments that can behave similarly to cash.

Investment platforms and savings experts say the development highlights how difficult the reforms could be to implement in practice.

Andrew Prosser, Head of Investments at InvestEngine, said the reported workaround raises “important questions” about whether the policy would achieve its intended goal of encouraging long-term investing.

“Reports that investors may be able to sidestep the proposed reforms with a token stock holding highlight just how difficult these rules could be to design and implement cleanly in practice,” he said.

“The Government’s aim of encouraging long-term investing is understandable, but the risk is that increasingly complex rules create confusion rather than changing behaviour.”

Prosser added that cash holdings within investment accounts are often used for practical portfolio management purposes, such as rebalancing investments, managing regular contributions or covering trades — rather than avoiding tax.

He also noted that money market funds and overnight ETFs are commonly used by mainstream investors to manage liquidity or reduce volatility while deciding on longer-term investment strategies.

According to InvestEngine, around 17% of its clients currently hold an overnight-rate ETF.

Savings platform Flagstone also warned that further ISA changes could damage confidence in the system and discourage saving.

Katie Horne, savings expert at Flagstone, said: “The possibility of the Chancellor adding a 22% levy to any ‘cash-like’ investments in a saver’s Stocks & Shares ISA would be a further blow.”

“Not only will the tax curtail the freedom savers have to make savings and investments that suit their personal needs, but it also risks confusing and complicating a system that was created to simplify personal finance.”

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Recent research conducted by Flagstone and Opinium in earlier this year found that Cash ISAs remain highly popular with savers:

• 67% of Cash ISA holders prefer them over all other savings options
• 66% choose Cash ISAs instead of Stocks & Shares ISAs because they want to avoid investment risk
• 77% say Cash ISAs help encourage good saving habits

The Treasury has not yet confirmed how the rules around “cash-like” investments inside Stocks & Shares ISAs would be defined, leaving uncertainty over how the reforms may ultimately work in practice.