UK: ISA reform 2027: anti-circumvention rules for Non-Cash ISAs

The aggregate annual subscription limit of £20,000 will otherwise remain in place for Stocks and Shares ISAs and Innovative Finance ISAs (together, Non Cash ISAs). Lifetime ISAs are also affected by aspects of the reforms.

What do the rules address?

The reforms are intended to prevent the use of Non‑Cash ISAs to replicate cash ISA outcomes. They will affect ISA managers, platforms, fund managers, distributors and firms offering cash sweep arrangements or Money Market Fund (MMF) exposure within ISA wrappers.

The proposed measures include:

• a flat-rate charge (by ISA managers, at the savings basic rate (currently 20%, rising to 22% from 6 April 2027)) on interest or alternative finance return on cash held within Non-Cash ISAs;
• restrictions on transfers from Non‑Cash ISAs into Cash ISAs for individuals under age 65; and
• restrictions on holding investments consisting entirely of MMFs within Non Cash ISAs.

Summary of anti-circumvention rules

Key implications

• cash balances within Non‑Cash ISAs become less attractive due to the manager-level tax charge at the savings basic rate (currently 20%, rising to 22% on 6 April 2027).
• the charge is borne at manager level as a proxy tax, with no investor reporting or reclaim available.
• cash sweep arrangements are likely to require redesign or tighter controls.
• transfer functionality must prevent transfers into Cash ISAs for under‑65 investors (including of prior‑year subscriptions), subject to the age-based carve-out.
• MMF usage within ISA wrappers will be constrained only to the extent that portfolios cannot consist entirely of MMFs; predominantly MMF portfolios remain possible.

What should I do?

Firms should begin assessing the impact of the reforms now, both to inform consultation responses and to allow sufficient lead time for system and product changes.

In particular:

• Review product design

Identify Non‑Cash ISA offerings that rely on sustained cash positions and assess whether redesign is required.

• Assess cash sweep arrangements

The 22% charge will apply to interest on cash held within Non‑Cash ISAs. Firms should consider whether existing sweep arrangements remain appropriate, including whether defaults, thresholds and client disclosures require amendment.

• Operation of the manager-level charge on cash interest

ISA managers will be required to account to HMRC for the charge on an annual basis, with payment due within 6 months after the end of the relevant tax year. Firms should assess whether existing withholding or reporting infrastructure can be adapted.

• Update transfer systems and processes

Transfers from Non‑Cash ISAs to Cash ISAs must be blocked for under-65 investors from 6 April 2027 (subject to age‑based exceptions). Systems and operational procedures will need updating.

• Review MMF distribution

Portfolios invested entirely in MMFs (disregarding cash) will fail the qualifying investment condition. Firms should assess how MMFs are offered within ISA wrappers and whether product governance changes are required. Predominantly MMF portfolios remain permissible, provided they include at least some non-MMF investments.

• Prepare for reporting obligations

ISA managers will need to report the market value of MMFs held in Non‑Cash ISAs, along with any amount of income tax that will now be due on amounts of interest or alternative finance return on cash deposits held under a stocks and shares or innovative finance ISA, through existing statistical returns.

• Implement age‑verification checks

Individuals aged 65 and over retain a £20,000 Cash ISA allowance, with the transfer restriction disapplied where the individual is 65 or over at the end of the relevant tax year. Systems must identify qualifying savers accurately.

• Consider Consumer Duty implications

Assess whether product design, disclosures and customer journeys remain consistent with FCA expectations.

• Update client communications and disclosures

Terms, conditions and key information documents will require revision, and client notifications may be needed.

• Review governance arrangements

Consider the interaction with target market assessments, value assessments and distribution strategy.

Overview of the anti‑circumvention approach

The rules are designed to prevent:

• holding cash long‑term within a Non‑Cash ISA with tax‑free treatment;

• transferring Non‑Cash ISA subscriptions into a Cash ISA (for under-65 investors); and

• using Non‑Cash ISAs in such a way that all non-cash investments consist of MMFs.

The policy objective is to reinforce the reduced Cash ISA allowance and encourage investment rather than cash‑holding within Non‑Cash ISA wrappers.

Details of the rules

Treatment of MMFs

From April 2027, the draft regulations introduce specific treatment for MMFs:

• MMFs are permitted as qualifying investments within Stocks and Shares ISAs;
• they must not constitute 100% of the value of investments (other than cash) within the account; and

• this prevents Stocks and Shares ISAs being used as pure MMF (cash-equivalent) vehicles.

No broader definition of “cash-like assets” is included in the draft regulations at this stage.

The manager-level charge

The charge operates by disapplying the ISA tax exemption for interest (or alternative finance return) on cash held in Non-Cash ISAs and imposing a manager-level charge at the savings basic rate on such amounts.

• it applies regardless of the saver’s marginal income tax rate.
• it does not apply to returns on investments.
• it applies irrespective of the saver’s age, including those aged 65 and over.
• it does not give rise to taxable income at investor level and does not interact with the personal savings allowance.

Over-65s

Individuals aged 65 and over retain a £20,000 Cash ISA allowance from the tax year in which they reach age 65.

For those individuals:

• the transfer restriction (Non-Cash ISA to Cash ISA) is disapplied;
• however, the 22% charge and the prohibition on 100% cash like investments continue to apply to Non-Cash ISAs.

Wider ISA reforms

Long-Term Asset Funds (LTAFs)

The Government confirms that LTAFs have been eligible for inclusion in Stocks and Shares ISAs since April 2026; this is part of the Government’s strategy to promote investment in productive assets.

Lifetime ISAs (LISAs)

LISAs are not the primary target of the anti‑circumvention rules. However, to the extent that a LISA holds investments (rather than cash), certain measures will apply in the same way as for Stocks and Shares ISAs. In particular, cash held within an investment LISA will be subject to the new manager‑level charge on interest, and portfolios invested entirely in MMFs will not be permitted. By contrast, the reduced cash ISA subscription limit and the new transfer restrictions are not generally relevant to LISAs, which remain subject to their existing statutory framework.

First Time Buyer ISA

The Government is consulting on a new First Time Buyer ISA, expected to be introduced in 2028 as a replacement for the LISA.

Key features include:

• a simplified, house purchase focused design;
• payment of the government bonus at the point of withdrawal; and
• removal of withdrawal penalties.

Existing LISAs may continue, and new LISAs may be opened until the new product launches.

Targeted Support

The Government and the FCA introduced a targeted support regime in April 2026, intended to enable firms to provide more personalised guidance within the regulatory perimeter. This may be relevant to how firms communicate ISA reforms.

HMRC publications

HMRC has published:

• an anti-circumvention factsheet;
• Tax Free Savings Newsletter 22; and
• consultation draft regulations (not yet laid before Parliament) titled the Individual Savings Account (Amendment No. X) Regulations 2026.

Key technical points for consultation

The draft regulations raise a number of technical and operational issues, including:

• the scope of “cash deposit” for the purposes of the charge;
• the breadth of the rule deeming interest not to be income for tax purposes;
• monitoring and applying the MMF 100% condition;
• the absence of clear breach or cure mechanics;
• interaction with platform cash arrangements; and
• operational application of transfer restrictions.

We will be responding to the consultation and can incorporate your views on an attributed or anonymous basis. The consultation closes on 2 August 2026.

How Eversheds Sutherland can help

Eversheds Sutherland advises asset managers, ISA managers, platforms, banks and distributors on savings and investment products, product governance, regulatory change and customer communications. We can help firms assess the impact of ISA reform, respond to the technical consultation, review product terms and prepare for implementation.

We can assist with:

• analysing the impact of the anti-circumvention rules on your product range and distribution model;
• reviewing and updating ISA documentation and disclosures;
• advising on cash sweep arrangements and the application of the 22% charge;
• MMF product governance, target market assessments and value assessments;
• system and process changes for transfer restrictions and age verification;
• Consumer Duty assessments;
• preparing responses to the HMT technical consultation; and
• advising on the transition from LISA to the new First Time Buyer ISA.