HMRC has warned that some funds may no longer be eligible to be used in a stocks and shares Isa from the end of 2012.

Due to the RDR, fund charges will no longer include pre-determined commission for advisers which will affect their eligibility to be used in a stocks and shares ISA.

In the latest Isa bulletin, HMRC says funds will be subject to ‘the five per cent test’.

Government securities funds, certain corporate bonds funds and funds which guarantee a return to investors are particularly affected.

Funds will be allowed to be included in a stocks and shares ISA if:

• There was no guarantee or agreement that the investor would receive 95 per cent or more of their purchase price at any time in the next five years.
• The nature of the investments held did not significantly limit the risk to the investor’s capital to five per cent loss or less at any time in the next five years.

The test is applied after any charges have been taken.

If a fund does not pass these factors then they can only qualify for the cash component of an ISA.

To help advisers HMRC has provided the following example:

“Fund A will pass the five per cent test if it has an initial charge of three per cent and a guarantee that losses will be capped at three per cent. Fund A is eligible for the stocks and shares component because the effect of the charges means that if three per cent capital loss were sustained, only 94 per cent of the investment amount would be returned to the investor.”