With the polls predicting a Labour landslide on 4 July, it remains to be seen whether the proposed UK ISA announced in Chancellor of the Exchequer Jeremy Hunt’s March Budget ever sees the light of day.
A consultation on the proposed additional £5,000 annual ISA allowance closes at midnight today (Thursday 6 June). The consultation seeks to gather views on what eligibility criteria should be applied. For example, will all UK listed companies be allowed, including investment trusts that invest entirely overseas?
Labour has not said a lot on the so-called ‘British ISA’ proposal, but has promised to conduct a review of ISAs aimed at ‘simplification’. This might conclude that launching yet another addition to the sprawling range of ISAs – Junior ISAs, Innovative Finance ISAs, Lifetime ISAs, Stocks & Shares ISAs and Cash ISAs – is surplus to requirements.
This is especially the case, as it will likely only be used by wealthier people who have first maximised their core £20,000 allowance and have further cash to deploy.
However, in recent days, media reports have cited a spokesperson saying the party “has no plans to drop the British ISA”. That isn’t quite an unequivocal commitment to go ahead with it, but it does suggest it isn’t yet dead in the water. Some ISA providers have been dismissive of the plan, even publicly, and may well seek to bend the ear of Labour to get it quashed.
Government’s interventionist role
Channelling investors’ money into UK assets, however, seems very much in line with Labour’s broader thinking. When the scope for raising taxes is limited by the fact that they are already painfully high and a borrowing blitz will not be tolerated by the bond markets, steering private capital to back national priorities and projects via supply-side reforms and regulations looks set be one of the main levers a Labour Government can pull to deliver its “Secureonomics” vision.
In her Mais Lecture in March, Shadow Chancellor Rachel Reeves said Labour will “launch a review of the pension system, to ensure it is serving British savers and UK PLC”, and she talked about the state playing a strategic role in prioritising investment areas.
This suggests the Government will play a more interventionist role in directing private capital – such as pension schemes – to allocate it to certain activities. This goes further than Chancellor Jeremy Hunt’s ‘Mansion House Compact’ announced in July last year, where two-thirds of workplace Defined Contribution pension schemes voluntarily committed to allocate 5% into unquoted UK companies by 2030.
British ISA: Benefit or step backward?
Back to the British ISA. The ability to invest an extra £5,000 tax-free each year – if it does come to fruition – is welcome news of sorts, given that the core ISA allowance has been frozen at £20,000 for several years and the Lifetime ISA has never been increased since inception. However, moves to steer investors into UK assets are a double-edged sword.
It is not impossible that a future Government could decide that the main ISA allowance should have restrictions on how much can be invested outside of the UK. Such a move would cause uproar with investors, but one way to achieve this quietly by stealth would be to keep the core allowance frozen so that it gradually withers in real terms, while focusing future increases solely on the ‘British ISA’ allowance until it becomes the bigger beast.
The steering of ISAs towards UK equities and potential moves to drive large pension schemes to increase allocations to UK equities could certainly have benefits for both the domestic economy and the UK equity market. It has struggled in recent years from outflows, a dearth of IPOs, low valuations, and defections by companies to overseas exchanges.
It is therefore easy to see why politicians may be tempted to head in this direction and argue UK tax incentives should be focused on driving investment into UK companies.
Some of the UK stockbrokers and UK equity fund managers who lobbied hard for the British ISA would probably welcome further moves to narrow the investment remit of ISAs to focus on UK equities, in the hope this would drum up liquidity to support the market from which they earn fees advising on IPOs, research, trading and corporate broking.
However, whatever the public policy merits of such an approach and benefit to the City of London, from an investor’s perspective, anything that reduces flexibility to find the best investment opportunities across the globe and instead directs their wealth into areas that meet national priorities would be a step backward.
It should be remembered that back in the days of Personal Equity Plans, the predecessor scheme to ISAs, only £1,500 out of the £6,000 General PEP allowance could be invested in ‘non-qualifying funds’ – i.e., those that invested outside of the UK market.
The greater investment flexibility that came with ISAs has undoubtedly been a hugely positive development for investors, literally opening up a world of opportunities from across the globe, including fast-growing technology and biotechnology companies. It has also enabled savers to achieve higher returns and more secure financial futures as a consequence.
Let’s hope that freedom to invest globally in a tax-efficient manner isn’t gradually chipped away.
Jason Hollands is managing director of Bestinvest by Evelyn Partners
