ISA reform means changes for savers
From 6 April 2027, anyone aged under 65 will only be able to save a maximum of £12,000 into cash individual savings accounts (ISAs) each tax year. The overall ISA limit will, however, remain at £20,000, with new rules introduced to minimise the opportunity for the lower cash ISA limit to be circumvented.
Aim of the new rules
The new rules are being introduced to prevent a saver from subscribing up to £20,000:
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In cash into a non-cash ISA and leaving the cash there long-term, earning tax-free interest.
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In a non-cash ISA and then transferring those funds to a cash ISA.
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To a non-cash ISA and then using the funds to purchase cash-like investments.
A non-cash ISA means a stocks and shares ISA or an innovative finance ISA.
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What this means
There will be a 22% charge on any interest paid on cash held within a non-cash ISA. This rate applies even if a saver is a higher or additional rate taxpayer. The personal savings allowance cannot be used to mitigate the charge.
The transfer restriction means surplus cash cannot be moved to a cash ISA to escape the 22% charge. To avoid the charge, cash will have to be invested or withdrawn from the ISA.
A non-cash ISA portfolio made up of 100% cash-like investments will not be permitted:
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Only money market funds (these are low risk, investing in highly liquid, short-term debt securities) will be treated as a cash-like investment.
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The existing ISA investment rules are unchanged, so investments such as short-dated UK gilts will not be treated as cash-like investments.
The 100% requirement does appear to present an easy loophole, since holding just a penny’s worth of shares should circumvent the restriction.
65 and over
Savers aged 65 and over will continue to benefit from the current cash ISA limit of £20,000. Entitlement will apply from the start of the tax year in which a saver reaches 65.
From that point, the transfer restriction will no longer apply. The charge on interest earned on cash held in a non-cash ISA and the prohibition on 100% cash-like investments will, however, remain in place.
The government’s factsheet on the ISA anti-circumvention rules is available here.
For further information, contact LFB on
Pension pots and care home fees
People are updating their tax-planning strategies to take account of inheritance tax (IHT) being charged on unused pension pots from April 2027. An unintended consequence of such planning, however, is the impact on long-term care costs.
The problem
If capital and savings are above £23,250, then in England a person has to fund all of their long-term residential care. This might seem a low threshold, but remember the value of your home will be disregarded if your partner (or a relative aged 60 or over, or a dependent child) continues to live there. Therefore:
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Deprivation of assets rules mean that a person cannot obtain care cost funding by gifting assets to their family.
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This is where the new pension tax rules can be an issue: many older people are attempting to reduce future IHT bills by withdrawing large sums from their pensions, and then gifting the money to children and grandchildren.
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A local authority might well treat such gifts as a deliberate deprivation of assets.
There is no time limit on how far back local authorities can look. If a person is found to have deprived themselves of assets, they will be treated as still owning the money or assets that were given away.
Given longer life expectancy, the financial impact of unexpectedly having to fund care costs can be substantial.
The right balance
A substantial gift may well meet the IHT objective, but could create future difficulties when care costs come into play.
Local authorities will look at whether care needs were foreseeable at the time a gift was made, so earlier gifts when made in good health will be much easier to justify. Detailed record keeping is essential. The records should show that the purpose of a gift is genuine estate planning or family support, as opposed to avoiding care costs.
Age UK’s detailed factsheet on deprivation of assets can be found here.
For further information, contact LFB on