UK Announces ISA Reforms: New First-Time Buyer Account and Tax on Stocks & Shares Interest

The UK Treasury announced reforms to Individual Savings Accounts (ISAs) on Tuesday, introducing a new first-time buyer ISA without an upper age limit and imposing a 22% tax on interest earned from cash held in stocks and shares ISAs, set to take effect in April 2027.

Currently, savers can invest up to £20,000 annually in ISAs, with tax-free returns. The new first-time buyer ISA will offer a 25% government bonus upon property purchase, unlike the annual bonus of the discontinued Lifetime ISA (Lisa), which had a 40-year age cap for new entrants. The Treasury justified the open age limit, citing the rising age of first-home buyers.

The new ISA eliminates the 25% penalty for non-property withdrawals but retains the £450,000 property price cap, unchanged since Lisa’s 2017 launch despite rising house prices. Experts like Rachael Griffin of Quilter noted this cap’s inadequacy, suggesting it fails to address current market realities.

Separately, to prevent circumvention of new £12,000 annual cash ISA limits for under-65s (effective April 2027), HMRC will tax interest on cash in stocks and shares ISAs at 22%. Investors will also face restrictions on holding over 100% of their ISA in money market funds.

Responses to the reforms were mixed. The Building Societies Association welcomed the stocks and shares ISA rules, while Rachel Vahey of AJ Bell criticized the added complexity, arguing it could discourage investment.

The reforms aim to encourage investment over cash saving but may inadvertently complicate the ISA system, potentially deterring new investors.