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HMRC Plans to Exclude Money-Market Funds from Stocks-and-Shares ISA Eligibility
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Published in Stocks and Investing on Tuesday, December 2nd 2025 at 14:20 GMT by MoneyWeek- 🞛 This publication is a summary or evaluation of another publication
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Will HMRC Block Money‑Market Funds from the Stocks‑and‑Shares ISA Allowance?
The UK’s tax‑free Stocks‑and‑Shares ISA has long been a popular vehicle for people looking to grow their savings without paying tax on dividends or capital gains. But the government’s tax authority, HM Revenue & Customs (HMRC), has signalled that a new change may soon strip a popular investment class—money‑market funds—from the ISA’s “eligible” pool. The move has triggered a wave of questions about what it means for savers, and whether the government will truly “block” these funds or simply limit their use within the account.
What are Money‑Market Funds?
Money‑market funds are a type of pooled investment that buys short‑term, low‑risk debt securities, such as Treasury bills, commercial paper and certificates of deposit. They are often marketed as a safe, liquid place to park cash while still earning a return higher than a conventional savings account. While they are not “cash” per se, they are treated as low‑risk fixed‑income instruments. Because they are largely short‑dated, the risk of capital loss is very low, although it is not zero—interest rates can drop or credit defaults can occur.
The funds are usually structured as open‑ended investment trusts, meaning investors can buy and sell units in real time at the fund’s net asset value (NAV). Investors often choose them for their “steady” returns and the convenience of a managed vehicle.
HMRC’s New Guidance
In early 2025, HMRC published a draft policy paper titled “Review of ISA Eligibility – Money‑Market Funds” (available in a PDF on the official HMRC website). The paper outlines the regulator’s view that, because money‑market funds are low‑risk and generate modest returns, they should no longer qualify as part of the “investment” category that a Stocks‑and‑Shares ISA is designed to support. In other words, the government is not simply tightening the ISA; it is redefining the boundary of what the account can hold.
According to the guidance:
- Only “eligible” investments—those that are expected to provide a long‑term, potentially higher return than cash—can be held in a Stocks‑and‑Shares ISA.
- Money‑market funds do not meet this criterion, as they are considered too low a risk and too closely resemble cash.
- The change will take effect from the 2024/25 tax year and will apply to all new ISA accounts, and will be retroactive for existing holdings by the end of the current tax year.
The policy paper also notes that investors can still hold money‑market funds in a Cash ISA, but these are not counted towards the annual ISA contribution limit and are subject to different tax rules.
Why the Change?
The motivation behind HMRC’s decision is part of a broader review of the ISA’s purpose in a low‑interest‑rate environment. With real‑time returns from money‑market funds barely exceeding inflation, the regulator argues that the tax‑free status of the ISA is being misused as a means of avoiding tax on what is essentially “cash” held in a fund vehicle. By restricting these funds, HMRC hopes to preserve the ISA’s role as a genuine investment vehicle that encourages long‑term growth rather than merely sheltering low‑yield cash.
Financial‑services commentators are split on the move. Some applaud HMRC for curbing “tax‑free cash hoarding,” while others warn that the decision may discourage people from using the ISA at all, pushing them into less tax‑efficient vehicles or even out of the market entirely.
How Will It Affect Investors?
If the policy is implemented, investors who currently hold money‑market funds in their Stocks‑and‑Shares ISA will have to make a choice:
- Transfer the holdings into a Cash ISA or a taxable brokerage account. The transfer can be done by contacting their ISA provider, who will handle the logistics.
- Accept tax on future earnings from the money‑market fund when it remains in the Stocks‑and‑Shares ISA. The fund’s dividends and capital gains would be taxed at the investor’s marginal rate, erasing the tax‑free benefit that the ISA provided.
Given that many money‑market funds pay out dividends, which are taxable if held in a taxable account, the net effect will be a reduction in the after‑tax yield of the investment.
In addition, the move will tighten the scope of the annual ISA allowance. The maximum tax‑free contribution for the 2024/25 tax year remains £20,000, but the funds that can be used to reach that limit are now further constrained.
What Are the Next Steps?
- Check with your ISA provider: Most platforms will release an FAQ explaining the change and will provide tools to help you transfer or reallocate assets.
- Consult a financial adviser: If your ISA is heavily weighted toward money‑market funds, a professional can help you assess the best alternative structure, whether it be a Cash ISA, a different type of fund, or a combination of assets.
- Watch for HMRC updates: HMRC may issue a more detailed final guidance or a transitional period for existing ISA holders before the policy is fully enforced.
Broader Implications
The change also signals HMRC’s willingness to scrutinize other “low‑risk” products that might be housed in a Stocks‑and‑Shares ISA, such as high‑yield savings accounts or “cash‑like” bonds. While the current focus is on money‑market funds, future revisions could extend to other categories that are deemed too close to cash.
For policymakers, the aim is to preserve the ISA’s tax‑free advantage for genuine investment growth while limiting its use for what the regulator considers “tax‑free cash." For investors, the practical effect is to rethink the composition of their ISA holdings, ensuring that the account remains an efficient tool for long‑term wealth accumulation.
In short, HMRC’s forthcoming decision to exclude money‑market funds from the Stocks‑and‑Shares ISA is a significant shift in the UK’s tax‑free investment landscape. While it may reduce the convenience of holding these funds in a tax‑free wrapper, it also underscores the importance of aligning ISA holdings with the account’s intended purpose—building real wealth over time.
Read the Full MoneyWeek Article at:
[ https://www.msn.com/en-gb/money/financial-regulation/will-hmrc-block-money-market-funds-from-the-stocks-and-shares-isa-allowance/ar-AA1RzTDr ]
