Will money market funds be blocked by HMRC from the ISA allowance for stocks and shares?

Under new ISA regulations from HMRC, cautious investors seeking cash-like returns may not be allowed to use money market funds in a stocks and shares ISA

How might that affect you?

The incoming 12,000 cash ISA limit on April 6, 2027, may apply to money market funds and other cash-like investments, making it more difficult for investors to control their risk profiles.

Cash-like investments, which experts believe could include money market funds and comparable investments like short-dated bonds, will be tested to determine whether they are eligible to be held in a stocks and shares ISA or a cash ISA under new regulations released by HMRC.

Money market funds are currently available as a bridge between cash savings and investing through the opening of an ISA for stocks and shares for novice investors. From within an ISA for stocks and shares, they provide low-risk, cash-like returns.

The popularity of money market funds has also been growing, and in November, DIY investors bought some of the most popular funds.

However, the reforms HMRC is proposing could prevent new or cautious investors from using money market funds or short-dated bonds to manage their risk if there is conjecture that these instruments would be regarded as cash-like.

"Blocking money market funds within stocks and shares ISAs would be a serious setback for investors," stated Kaldi co-founder Mark Burges Watson. "These funds are among the safest short-term investment options; they are low-risk, cash-like, and currently yielding over 4%, which is significantly higher than high street banks' instant-access cash ISAs. A "

"Rules will be introduced to avoid circumvention of the lower limit for cash ISAs, including tests to determine whether an investment is eligible to be held in a stocks and shares or innovative finance ISA, or is cash like," an HMRC spokesperson said in response to BFIA's request for clarification regarding whether money market funds would be deemed "cash-like" under the new rules and how the mechanism for enforcing the corresponding limits would operate.

"If an investment complies with the regulations, it will be eligible for inclusion in an ISA. Following talks with stakeholders, the specifics of the rule changes will be made public beforehand. The "

In addition to prohibiting transfers from stocks and shares to cash ISAs, the new HMRC regulations will impose a fee on any interest paid on cash holdings in stocks and shares or Innovative Finance ISAs.

What makes money market funds popular among investors?

Money market funds are currently permitted to be held in an ISA for stocks and shares. This implies that they would potentially avoid the impending reduction in the annual cash ISA limit to 12,000, which will impact individuals under 65.

According to Burges Watson, "millions of savers will be forced into taxable accounts for their excess savings with the cash ISA allowance cut to 12,000." "While choosing how to invest or controlling short-term market volatility, money market funds provide savers with a safe place to park their money. The "

Savers could theoretically deposit 12,000 per year in a cash ISA and put the remaining 8,000 into money market funds in a stocks and shares ISA, using their full 20,000 ISA allowance while keeping it in low-risk, cash-like investments, if money market funds were still eligible for stocks and shares ISA inclusion (or would otherwise be exempt from the cash-like investment restrictions).

Limiting access to less risky products "undermines the very purpose of ISAs: supporting safe, flexible investment," Burges Watson continued.

Many investors are particularly concerned about market volatility, as stretched stock market valuations raise concerns about 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," stated Ryan Hughes, AJ Bell Investments' managing director.

In the 12 months leading up to November, assets invested in the Money Market model portfolio service (MPS) on the advised platform of AJ Bells tripled. The MPS invests in cash as well as cash alternatives like money market funds and ultra-short-dated bonds. It is only accessible to clients advised by AJ Bell.

How would access to money market funds be restricted by HMRC?

The implementation of a potential rule change is still unclear. The draft legislation to amend ISA regulations will be presented to Parliament "well ahead" of the April 2027 rule change, according to HMRC's website, and the industry will be consulted on it.

According to HMRC's response to BFIA's inquiry regarding enforcement, stocks and shares ISA eligibility will probably not apply to cash-like investments.

However, putting the block into practice could make the ISA system even more complicated, which detractors claim is already confusing to novice investors.

HMRC may not be able to alter the designation due to the nature of money market funds.

Burges Watson stated that because money market funds are categorized as investments, carry a Capital At Risk warning, and are not covered by the FSCS, HMRC may find it difficult to enforce these restrictions.