The British ISA: Is the tax tail wagging the investment dog?

02/05/2024
By David Snelling

In his 2024 Budget statement the UK chancellor, Jeremy Hunt, announced government plans to launch a new British ISA, to sit alongside other ISA options currently available.

He announced there would be a consultation process before the final details of what the British ISA will look like are confirmed.

In this article, you can read what we know so far, and our assessment of whether you should consider investing in one.

The chancellor was clear about the aims of the British ISA

With Fidelity reporting that more than £40 billion has been withdrawn from UK-focused investment funds over the last few years, it’s clear that the government are seeking ways to encourage and boost investment in UK industry and businesses.

The bulk of the assets withdrawn has come from pension funds, and the chancellor has considered specific steps to hopefully reverse that outflow of money.

While on a smaller scale and aimed at individual investors, this separate move is designed to have the same effect.

ISAs have been a success story since they were launched by the then chancellor Gordon Brown in 1999. A separate Fidelity report, reveals that more than £700 billion has been saved or invested in ISAs over that 25-year period and you could have contributed more than £325,000 tax efficiently over that time.

The chancellor is clearly looking to capture some of that magic, boost personal investment, and give UK stock markets a shot in the arm.

However, I think the ultimate effect on UK markets is likely to be minimal. Indeed, according to Morningstar, even if all eligible current Stocks and Shares ISA holders maximised their additional British ISA allowance of £5,000, that would amount to just 0.2% of the UK market’s aggregate value.

The new ISA option expands your access to a tax-efficient investment option

Regardless of how much you earn, if you are over 18, you can currently save or invest £20,000 (2024/25 tax year) in a Cash or Stocks and Shares ISA each tax year.

Your ISA savings and investments will be free from any tax on the interest or investment growth. The same applies with any money you draw from your fund, making them a highly tax-efficient option.

The British ISA provides an additional annual £5,000 allowance on top of the existing £20,000 you can currently contribute to a Stocks and Shares ISA.

Given the favourable tax status accorded to investments in an ISA, this new option is also designed to offset the recent reductions in your Capital Gains Tax (CGT) allowance, which has reduced from £12,300 in 2022/23 to just £3,000 in 2024/25 tax year.

The government are consulting on the detail of the investment options available

As you would expect, there have been questions over what counts as a UK-focused asset and, as a result, what investment choices will be available.

The consultation document published by the government suggests that shares in UK-listed companies will be eligible to be included in a British ISA, together with bonds, gilts and UK Equity funds.

That does raise questions with regard to how “British” a new British ISA will actually be. For example, a Morningstar report estimates that more than 82% of the revenue generated by FTSE 100 companies comes from outside the UK.

We would anticipate that, in order to facilitate the launch of the new option as quickly as possible, there will be limited parameters around acceptable investments and expansion of these at a later date.

The British ISA raises the issue of home bias in investment choice

Perhaps the strongest argument against the proposed British ISA is that it could encourage home bias – the tendency for investors to favour their domestic market.

I’ve previously written about this from a Hong Kong perspective where I encountered it a lot, and consider it one of the greatest investment mistakes you can make.

It’s not limited to any particular country. It happens all over the world, as investors put their money in markets and companies they are familiar with.

Often this comes down to three factors:

  • Having more information about companies in your home market
  • Better name recognition
  • The perception that investing in overseas markets can be both more expensive and riskier.

A British ISA won’t reflect worldwide markets

The same Fidelity report referenced earlier revealed that UK companies account for just 4% of the total value of shares worldwide. Furthermore, this figure has more than halved in just the last decade.

Despite that, it cites that the average balanced model portfolio has a 25% exposure to UK shares, which is often down to the management of currency risk.

A £5,000 investment in a total investment of £25,000 is 20% – nearly six times the actual percentage any worldwide tracker should hold in UK stocks.

The tax tail is wagging the investment dog

From an investment perspective, the growth you enjoy in your Stocks and Shares ISA is exempt from CGT so an additional £5,000 ISA contribution would increase the amount you can invest tax-efficiently to £25,000 each year.

But, with an overweight investment in UK stocks, will the limited amount of tax you save offset the potentially poor investment returns you may attain?

To my mind, the tax saving will not compensate the potential lack of diversification, which is important in your portfolio as a whole, not just in £5,000.

Get in touch

If you would like to talk about your ISA contributions, or your investment strategy more generally, please do get in touch.

You can contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.

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