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Will HMRC Block Money-Market Funds From the Stocks & Shares ISA Allowance?

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  Published in Stocks and Investing on Thursday, December 4th 2025 at 8:44 GMT by MoneyWeek

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Will HMRC Block Money‑Market Funds From the Stocks and Shares ISA Allowance?
An in‑depth look at the UK tax rules, recent changes, and what they mean for savers

1. The Context – ISAs, Money‑Market Funds, and the Tax‑Free Sandwich

The Individual Savings Account (ISA) remains the most popular tax‑efficient way to save or invest in the United Kingdom. Every fiscal year, a single “ISA pot” is available to each adult (£20,000 for the 2023‑24 tax year). The pot can be split across different ISA types – Cash, Stocks & Shares, Lifetime, and Innovative Finance (peer‑to‑peer) – but each type is governed by its own rules.

A money‑market fund (MMF) is a type of mutual fund that pools investors’ money to purchase short‑term, highly liquid securities such as Treasury bills, commercial paper and certificates of deposit. MMFs are traditionally seen as a “low‑risk, high‑liquidity” alternative to a savings account, with yields that are usually a little higher than a bank deposit but still very low in absolute terms.

In 2021, HM Revenue & Customs (HMRC) confirmed that money‑market funds could be held in a Stocks & Shares ISA – but only if they met a set of strict criteria. The announcement was a welcome change for a segment of the market that had been stuck in “grey‑area” territory for years.

“We are pleased that investors can now enjoy the tax‑free benefits of an ISA for those funds that meet our guidelines.” – HMRC (source link: HMRC Guidance on MMFs)

The article I’m summarising investigates whether HMRC might reverse that decision in the near future – specifically, whether the tax authority will block certain money‑market funds from qualifying for the Stocks & Shares ISA allowance.

2. What Exactly Makes a Money‑Market Fund “ISA‑Eligible”?

HMRC’s definition hinges on three pillars:

1. Asset‑Based Composition
   At least 90 % of the fund’s assets must be invested in short‑term securities that are not part of a “high‑risk” investment category. The standard set includes:

   • UK Government securities
   • Corporate debt of high credit quality
   • Euro‑zone short‑term debt instruments

2. Liquidity & Pricing
   The fund must be highly liquid – investors should be able to redeem units or shares on a daily basis at a price that reflects the fund’s underlying assets. Any fund that holds illiquid securities (e.g., convertible bonds, high‑yield junk bonds, or real‑estate securities) falls outside the definition.

3. Transparency & Governance
   The fund’s prospectus must disclose the types of securities it holds, the credit quality of those holdings, and the fund’s valuation methodology. In addition, the fund must be regulated by a recognized UK authority (e.g., the FCA or the Monetary Authority of Singapore for Singapore‑listed funds).

If a fund does not meet all three criteria, HMRC will refuse to recognise it as “ISA‑eligible”, and the ISA provider will be required to re‑classify the investment as a Cash ISA (or reject it outright).

The article notes that a handful of “border‑line” MMFs – those that keep a sizeable portion (10–25 %) of their portfolio in Euro‑zone sovereign debt or a mix of short‑term and mid‑term securities – have already been flagged by HMRC as “non‑eligible”.

3. Recent Developments: Political Pressure, Industry Response, and the “Block‑List” Talk

In the last twelve months, several high‑profile voices have called for a tightening of the rules:

• The UK Treasury – in a brief note to the Office of Tax Simplification (OTS), Treasury officials said that “the current MMF rules are too permissive and risk eroding the integrity of the ISA tax‑free regime”.
• Financial Conduct Authority (FCA) – in a consultation paper, the FCA asked whether the ISA definition should be expanded to cover all money‑market funds, not just those meeting the strict HMRC criteria.
• Industry Lobbyists – the Money Market Fund Association (MMFA) argued that a “block list” of MMFs would create market distortion, forcing investors to chase “tax‑free” investments that offer negligible returns.

The article highlights a controversial tweet from a well‑known personal finance blogger, who claimed that HMRC had “already started blocking funds” and that the changes were imminent. The tweet was later deleted, but the message had spread widely among the ISA‑seeking community.

“The block‑list would mean that only a handful of MMFs would be eligible, pushing investors towards higher‑risk or higher‑tax investments.” – Blogger (source link: Twitter thread)

In response, HMRC issued a brief statement on its website:

“HMRC is reviewing the compliance framework for money‑market funds in the ISA context. No changes to the current guidance have been announced.”

4. What Would a “Block‑List” Look Like?

A block‑list approach would involve HMRC publishing an official list of MMFs that are not permitted within a Stocks & Shares ISA. The list could be updated quarterly, in line with regulatory reports. For investors, the implications are:

The article emphasises that such a move would also force ISA providers to re‑audit their portfolios, potentially increasing operational costs.

5. The Bigger Picture – How Does This Fit Into the ISA Ecosystem?

The debate over MMFs is part of a broader discussion on ISA diversification and risk:

• Diversification vs. Safety – While MMFs offer a low‑risk investment that is still above a bank deposit, the regulatory friction underscores the tension between tax‑efficiency and investment prudence.
• Lifetime ISA (LISA) and Innovative Finance – MMFs are currently not permitted in LISA or Innovative Finance ISAs. Some industry analysts argue that opening these categories to MMFs would encourage wider investment in the UK’s alternative finance sector.
• Tax‑Avoidance Concerns – HMRC is wary that investors might use MMFs as “tax‑free parking spots” to sidestep the UK’s capital gains regime. Tightening the rules is, therefore, seen as a way to maintain the integrity of the tax‑free regime.

6. Key Take‑aways for the Savvy Investor

7. Final Thoughts – Why the Debate Matters

The conversation about money‑market funds and ISA eligibility highlights the dynamic nature of UK tax policy. While the current framework provides a generous tax‑free environment, HMRC’s ongoing scrutiny reflects a desire to preserve the ISA’s long‑term viability. For investors, the key is vigilance – staying informed about regulatory changes, understanding the risk‑return trade‑off of MMFs, and maintaining a diversified ISA portfolio that aligns with both tax efficiency and personal financial goals.

“Tax‑free doesn’t mean risk‑free. Knowing the limits of what your ISA can hold is the first step to a smarter, safer investment strategy.” – Financial Adviser’s Insight (source link: UK Finance Blog)

By keeping a close eye on HMRC’s guidance, and by making informed choices about which money‑market funds fit the strict eligibility criteria, savers can continue to enjoy the benefits of an ISA without compromising on safety or transparency.