The Stocks and Shares ISA is now in the crosshairs of the government. Why? The government is looking to close possible loopholes following cuts to the Cash ISA allowance.
The move means savers and investors may need to alter their wealth-building strategies. But what are these changes to the stocks ISA? And what should ISA users like me do now?
Potted history
Last year, the government announced it was slashing the amount people can save each year in a Cash ISA. From next April, savers will only be able to put £12,000 in one of these accounts each tax year. That’s down significantly from the current allowance of £20,000.
The reason? According to the Treasury,
the government wants to see more people benefit from the higher returns and long-term financial resilience that investing can provide.
But here’s the thing. With many Stocks and Shares ISAs paying interest on cash holdings, people could save up to £20,000 a year in one of these instead and enjoy the same tax-free returns as the Cash ISA.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
What are the changes?
To stop this from happening, HMRC now says a 22% tax will be applied to interest on cash holdings within both Stocks and Shares ISAs and Innovative Finance ISAs.
This change will come into effect from April 2027 when the Cash ISA allowance cut comes in. Yet that’s not all. Other alterations include:
- Preventing people depositing £20,000 in a stocks ISA and then transferring this to a Cash ISA.
- Stopping Stocks and Shares ISA users from investing 100% of their allowance in money market funds (which have similar risk and reward characteristics to savings accounts).
How will these affect me?
I didn’t like those reductions to the Cash ISA announced last year. For me, it’s better to use the classic carrot instead of the stick to get people investing. But changes to the stocks ISA to close any loopholes makes sense before the savings allowance gets cut.
The thing is, none of these amendments will change my own personal investing strategy in the slightest. Why? I invest roughly 80% of my leftover cash each month in the stock market, so the new £12,000 Cash ISA allowance is more than enough for me. I suspect it’s the same for most people who follow the same strategy.
This way, I stand a better chance of building a large retirement fund with the help of shares, while also holding some money in cash to mitigate risk. Why wouldn’t I? Share investing delivers a brilliant average annual return of 9% over the long term. For this return, I think it’s a strategy everyone should consider, though returns like this are never guaranteed.
Building wealth the easy way?
I’m targeting big returns by buying a blend of individual shares and exchange-traded funds (ETFs). One I hold is the iShares Core MSCI Europe ETF (LSE:SMEA), which spreads my money across almost 400 different companies.
This fund is flying right now as global investors pile into undervalued European shares. ETFs like these are simple and cost-effective ways to diversify and target big returns, whether you’re a novice investor or experienced shareholder.
Over 10 years, this European iShares fund has delivered a strong average annual return of 9%. Can it continue? By harnessing the wealth-building power of stock markets, I think it can, though returns could disappoint during times of market volatility.
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Royston Wild owns shares in iShares Core MSCI Europe ETF.
