How Reeves’s cash ISA raid could cost first-time buyers thousands of pounds ...Middle East

I’ll be honest. In the weeks leading up to the Budget, when it became clear that Rachel Reeves was going to cut the cash ISA annual limit to £12,000, I found it hard to get too irate.

Very few people can save more than £12,000 each year anyway I thought. And if they can, it makes sense that many would want to invest that money anyway.

After all, investing – if done right – generally leads to better returns than cash savings anyway.

I still thought the same when the measure was announced in the Budget, although it seemed a little unfair that over-65s were having a carve-out allowing them to continue to put £20,000 in cash savings tax-free, unlike the rest of us.

My opinions changed on Friday, when details of how the policy would be implemented became clear.

In a bulletin released by HMRC, two details that financial experts had been waiting for were clarified.

One – if you hold cash in a stocks and shares ISA, interest paid on your money will be taxed, as it is with normal savings held outside an ISA. Two – you cannot transfer money from a stocks and shares ISA into a cash ISA, as you can now.

These two policies, when combined, are extremely bad for first-time buyers and in many cases might actually make aspiring homeowners less likely to invest.

If you’re buying a home in 10 years’ time, then it’s quite likely you’ll put most of your money saved into stocks and shares, in order to benefit from bigger returns than you would with cash.

But the new changes could harm you if you do this – even if you can only save less than £12,000 a year anyway. Here’s how.

Let’s say for argument’s sake that you put an average of £6,000 a year into an ISA each year towards your first home. Over ten years, between 21 and 31, you save a total of £60,000 into your stocks and shares ISA and it increases via strong investment growth averaging around 9 per cent a year, to £80,000.

At 31, you finally decide to buy your first home. Knowing that stocks and shares are deeply volatile, and with rumours of an AI crash on the horizon, you decide to move your money into cash in order to protect its value while you try and buy.

But now, you can’t. If you move it into cash within your stocks and shares ISA, you will face paying tax. If you want to move it to cash savings, this must be done outside an ISA.

£80,000 over the course of a year with an interest rate of 4.5 per cent – the best available on cash currently – nets you £3,600.

This is well over the tax-free limit for savings. If you’re earning over £50,270 – and therefore a higher-rate taxpayer – you could face a tax bill of £1,240.

And the problem exacerbates if you struggle to find a house to buy, or a purchase falls through – as it often does. In that case, you might end up paying tax over multiple years while you wait to buy, racking up a bill worth thousands of pounds.

Some may see this and think they’d actually be better just putting their £5,000 a year in cash all along, if they aren’t afforded the flexibility to move it when they wish.

If that’s the case, then the policy has had the opposite impact of what the Treasury wanted – of boosting investing.

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Luckily, the ISA changes are not due to come in for around 18 months. In that time, Reeves and the Treasury will be consulting with the industry to discuss the implementation of the changes.

Hopefully, in that time, issues like the above get ironed out.

If they don’t it is first-time buyers that have done the right thing and saved for their future, who will suffer.

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