Risk of complicated rules around proposed ISA taxation and 1p ‘loophole’

The Treasury has announced plans to introduce a 22% tax on interest earned from cash held within stocks and shares ISAs from April 2027, bringing it in line with the standard savings interest tax rate.

However, The Telegraph has identified a loophole that could allow savers to sidestep the charge. By investing as little as 1p in qualifying shares and keeping the remainder in money market funds, investors can effectively replicate holding cash without incurring the new tax.

Andrew Prosser, Head of Investments at InvestEngine, said: “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.

“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. If investors can potentially work around restrictions with a nominal holding, it raises important questions about whether the policy is delivering what it is intended to.

“For most people investing through ETFs, holding some cash within their portfolio is simply a practical part of managing their investments — whether that’s for regular contributions, rebalancing or covering trades — rather than an attempt to avoid tax. Across InvestEngine, clients typically hold some cash in their account at any given time, which underlines how common and routine this is for everyday investors.

“Cash-like investments such as money market funds and overnight ETFs are also widely used for sensible portfolio management reasons — whether that’s managing liquidity, putting money to work while deciding on longer-term investments, or reducing exposure to volatility. These are mainstream investment tools, not niche workarounds. Around 17% of InvestEngine clients currently hold an overnight-rate ETF.

“The challenge for policymakers now is to strike the right balance. Investors need rules that are simple, transparent and workable in the real world. The more complicated the framework becomes, the greater the risk of unintended loopholes, additional administration and ultimately undermining confidence in the ISA system itself.”