The government is proposing a ban on new investments into open-ended property funds held within ISAs if the changes to the funds’ redemption period floated by the City watchdog go ahead.

In a consultation paper published yesterday, HM Revenue and Customs said it was considering allowing existing investments in property funds to remain within the ISA but prohibiting the inclusion of ‘new’ investments in such funds.

The potential problem of open-ended property funds in ISAs stems from the Financial Conduct Authority’s ongoing consultation on requiring investors to give a notice period — potentially up to 180 days — before their investment is redeemed.

This goes against current ISA legislation, which mandates that account holders be able to access the funds or transfer them to another ISA within 30 days of making an instruction.

The government is therefore proposing to prohibit all new investments into open-ended property funds within ISAs if the rules floated by the FCA go ahead.

But to mitigate some of the impact on ISA holders, the government is eyeing a provision whereby those funds which are already in an ISA can remain in the account, despite having extended redemption arrangements.

Under one model floated by HMRC, existing property funds could be retained in the ISA but investors would be unable to make further investments into the funds.

The government’s alternative version would see investors be able to continue to add money into those specific property funds already held in the ISA, but investments in new, different, property funds would be prohibited.

However, HMRC warned that while either of the approaches could address the tax implications for consumers, they would potentially introduce greater complexity for ISA managers where property funds form part of a mixed portfolio.

The consultation closes on December 13, 2020.