Jeremy Hunt believes a dearth of investment in the UK stock market is hampering growth and competitiveness. So in this month’s Budget the chancellor unveiled an initiative to encourage Britons to put their money to work by investing in British stocks.
The British Isa will offer retail investors a £5,000 tax-free allowance on top of their existing annual £20,000 limit. The additional amount must be spent on UK investments including equities and bonds. But its detractors say the sums it will raise are a drop in the ocean, and investors might get better returns by placing their money elsewhere. A bigger allowance is a positive step, says Daniel Harrison, chief executive of wealth manager True Potential, but in this case it is “throttled” by its focus on the UK.
“I think it’s a bit of a wasted opportunity . . . if we’re trying to create a nation of savers and be bold about tackling the savings gap,” he said.
The UK market is not underperforming because of a lack of investment, he says. “There’s a lack of investment because it’s not a good place to do business.”
However, others say the British Isa could be a valuable chance for UK investors to support their home market and maximise their tax-free entitlements.
How will the British Isa work?
The government has opened a consultation on the plans until June 6, after which the exact design and implementation of the new product will be revealed.
Although the tax-free amount has been revealed, the government is considering which UK investments should be included.
For instance, it must decide what should be considered a “UK company”. The proposal suggests that UK incorporated companies which are listed or admitted to trading on UK stock exchanges should be eligible, but experts say this might create problems for internationally focused companies.
“There’s a conceptual problem, because the government wants to boost both the UK stock market and the UK economy,” says AJ Bell’s head of investment analysis Laith Khalaf. “You might want to boost companies that are listed here but do most of their business overseas because that helps the City of London — but obviously doesn’t help the UK economy.”
The qualification of investment trusts is also unclear. Although they are listed on UK stock exchanges, their holdings are often based overseas. In the proposal, the government has floated the idea that collective investment vehicles should have a minimum requirement for the value of their investments held in UK companies.
The government has also proposed that corporate bonds and gilts should be included in the British Isa. The amount of cash that can be held may also be restricted, by applying a tax rate or not allowing interest to be paid on it, to encourage holders to invest their money.
Under the plans, investors will be barred from using their British Isa allowance and then transferring the balance to another Isa. In the other direction, transfers from other Isas to a British Isa may be subject to limits.
The British Isa could include one noteworthy stock — NatWest — after Hunt announced plans to sell part of the state’s holding in the bank to retail investors.
At a meeting of the Commons Treasury Committee last week, Hunt was asked by Labour chair Harriett Baldwin if the British Isa will need to be established before the sale. He said he would “look into those timings”.
Who could benefit?
One criticism levelled at the British Isa is that its benefits will be largely restricted to the wealthiest in society. In 2020-21 — the latest available figures — only around 1.6mn people out of 10.8mn who paid into an Isa maxed out their £20,000 allowance.
“More options for tax-free investment are always welcome, but the British Isa is only likely to attract a relatively small amount of extra investment,” says Charles Incledon, client director at Bowmore Asset Management. “The number of people who reach their existing £20,000 Isa allowance is already very limited.”
However, for fortunate investors with extra cash to spare, the British Isa could be a sensible way to build their savings and maximise tax relief.
These investors may shift their existing UK investments into the British Isa, and use the freed-up allowance to put their money to work elsewhere.
“I don’t think it’s a single silver bullet but we do see use cases for it,” says James Carter, head of platform product policy at Fidelity International. “Those customers can now sweep £25,000 into their Isa and manage their allocations to create the level of geographical diversification that is necessary.”
However, it is unclear whether the extra £5,000 would be more productive in tax-free UK investments or a regular trading account. Over the past year the FTSE 100 has gained 1.23 per cent, while the S&P 500 has risen by 31.3 per cent.
“I understand what the government are trying to do, as everyone understands Isas,” says Nick Rolf, private client director at wealth management firm Investment Quorum. “But over long periods of time it’s the investment performance, not the tax you need to worry about.”
Where are the biggest opportunities?
The UK is home to strong companies in the financial, energy and consumer staples sectors, as well as high dividend-paying stocks for investors focused on income.
However, investors should also be mindful of the need to diversify their holdings.
“The concentration of the UK market is pretty high,” says Fidelity International investment director Tom Stevenson. “We’ve talked a lot recently about the Magnificent Seven [leading US stocks], but I think many people wouldn’t be aware that investing in the UK creates quite a bit of sector risk.”
However, the British Isa could be an opportunity for investors to look into a wider range of UK companies, and for those firms to benefit from increased investment.
“You might make a case for smaller companies doing a bit better out of this, because it’s a smaller market and a lesser amount of money can have a bigger impact,” says Khalaf.
