The fund sector at risk of an ISA ban

One popular fund sector could be deemed unsuitable to hold in ISA, explains Hannah Smith. 

HM Revenue & Customs (HMRC) is considering a ban on new investments in open-ended property funds through ISAs, as the government looks to take action following a series of fund suspensions across the sector. 

In August, the Financial Conduct Authority (FCA) proposed measures designed to address the liquidity problems faced by open-ended property funds during challenging markets. These include the possible introduction of a notice period of up to 180 days when investors wish to withdraw from a fund. 

However, this raises difficulties for investors using ISAs, as current ISA rules mean investors must be able to access their funds or transfer them to another ISA within 30 days of making an instruction to their account manager. This means open-ended property funds would no longer be eligible investments to hold in ISAs. 

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To solve this problem, HMRC may allow investors to keep their existing open-ended property fund investments within ISAs, but could ban any new investments being made in these funds within the ISA wrapper. 

The restrictions could take the form of either preventing any further money being invested in property funds within ISAs or, alternatively, not allowing any further investments in new, different property funds within the ISA. 

‘Vulnerable’ sector

The proposals recognise that a complete ban on open-ended property funds in ISAs “could create problems for ISA managers and investors where such property funds are currently held in ISAs”, HMRC says.  

The FCA’s proposed notice period comes as open-ended property funds begin to reopen, having been shuttered since March as volatile markets made underlying property assets impossible to accurately value.

The planned rule changes mean that property funds are set to become more difficult for investors to access, and this could leave the whole sector facing problems, suggests Oliver Creasey, head of property research at Quilter Cheviot.

“With the existing consultation by the FCA into 90- to 180-day notice periods, and now HMRC looking for views around their viability within ISAs, property funds are looking increasingly vulnerable as the sector gets harder to access,” he says. “Indeed, it looks like the FCA has made its mind up on the issue and HMRC is now looking at how it can be best implemented for ISA holders.”

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Is education the answer?

HMRC’s proposals look “marginally good news” for ISA investors with property fund holdings, because it means that they wouldn’t have to sell their existing investments. However, the plans would not help new property investors wanting to take advantage of the tax-efficient ISA structure. 

Over time, Creasey expects to see the level of assets held in property funds within ISAs fall sharply. Investors will be put off by the FCA’s notice period and may sell out of funds even if not forced to. Creasey suggests that a better approach might be to educate investors further about liquidity risk in funds. “We note in particular that the M&G [Property Portfolio] fund has been closed since early December 2019 for liquidity reasons, demonstrating that even a 180-day notice period may not be enough to fully protect investors,” he adds.

The consultation into whether open-ended property funds will be able to be held in ISAs will close on 13 December.

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