Rachel Reeves' new tax could ruin what make ISAs great
The proposed changes to ISA rules risk creating more confusion than clarity for everyday investors, writes investments expert Isabella Galliers-Pratt
At first glance, the proposed changes to ISA rules look like a sensible way to close loopholes.
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However, in practice, they risk creating more confusion than clarity for everyday investors.
The intention is understandable. Policymakers want to prevent people from exploiting ISA allowances by holding large amounts in cash within a stocks and shares wrapper. But the difficulty lies in distinguishing between deliberate behaviour and the natural mechanics of investing. Portfolios do not operate in neat, artificial boxes; markets move, assets are traded, and cash inevitably builds up and is redeployed over time. Trying to legislate against that reality is where these proposals begin to look challenging.
In practice, no portfolio is fully invested at every point in time. Some cash naturally arises from dividend payments, trade settlements, or timing gaps between purchases and sales. Even a well-managed portfolio designed to stay fully invested may temporarily hold 1-2% in cash.
This raises an obvious question: how will this be measured? If limits are placed on the proportion of cash that can be held, or the length of time it can remain uninvested, there needs to be clear and workable guidance. Without that clarity, investors could inadvertently breach rules simply by managing their portfolios prudently. There is a real risk that normal, sensible behaviour becomes penalised because the rules do not fully reflect how investing works in practice.
It is worth highlighting how UK government bonds, or gilts, are treated under these proposals. Conveniently for the government, given the need to fund borrowing, gilts are not treated as cash-like assets under these proposals, which does provide some positive respite for investors. Gilts can serve as an effective cash proxy within portfolios, and with yields currently around 4%, they offer a more attractive return than many traditional cash accounts.
As a result, investors may increasingly look to short-dated gilts to maintain liquidity without falling foul of technical cash limits, though this inevitably adds complexity to what has historically been a very simple and flexible savings wrapper.
Ultimately, ISAs have succeeded because they are simple, and any new rules should reflect how investing works in practice. Without that, well-intentioned reforms risk becoming difficult to implement and could deter the long-term investment in financial markets, particularly in the UK, that they are meant to encourage.
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Isabella Galliers-Pratt is Senior Investment Director at Rathbones.
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