The Individual Savings Account (ISA) was 25 years old on 6 April 2024, so it’s quite fitting that the government has chosen this time to overhaul the rules on how consumers can use this excellent tax-efficient savings and investment vehicle.
The new rules mean that you can now open more than one of the same type of ISA in a given tax year, and you have more freedom to make partial transfers between ISAs and purchase fractional shares.
These changes have been welcomed by savers, and in his 2024 Spring Budget, chancellor Jeremy Hunt announced more potential changes to the ISA landscape in the future. This includes the introduction of a new “UK ISA”, now dubbed the “British ISA”.
The British ISA would give savers an additional £5,000 to invest in UK assets
The British ISA would give you an additional £5,000 allowance to use on top of the £20,000 you have in the 2024/25 tax year. However, you would only be allowed to invest this £5,000 in UK shares.
While the full details are yet to be released, this new type of ISA could create more tax-efficient investment opportunities in the future and many investors support the idea.
Indeed, according to Professional Adviser, 57% of people who already have an ISA said they would consider opening a British ISA.
That said, critics have suggested that it may not be as beneficial as the government claims.
Read on to learn some of the potential pros and cons of a British ISA.
An additional £5,000 ISA allowance could help you reduce tax on your investments
The primary benefit of the new British ISA is that it would give you an additional £5,000 allowance with the same tax benefits that you normally receive when investing through a Stocks and Shares ISA.
This means that you don’t pay tax on any income or capital gains from investments held in your ISA.
The new British ISA would allow you to make further tax-efficient investments if you have already used your £20,000 ISA allowance for the year. This may be especially beneficial from 6 April 2024 due to changes in the tax rules surrounding non-ISA investments.
In the 2023/24 tax year, you didn’t pay tax on any dividend income from non-ISA investments provided it fell within your Personal Allowance of £12,570. Additionally, you had a Dividend Allowance of £1,000.
However, any dividend income that exceeded your Personal Allowance and Dividend Allowance was taxed at your marginal rate of Income Tax.
Unfortunately, the Dividend Allowance fell to £500 on 6 April 2024.
Also, the Capital Gains Tax (CGT) Annual Exempt Amount – the value of gains you can make from selling or disposing of a qualifying asset before you are subject to CGT – was halved to £3,000 at the start of 2024/25.
These changes could mean you pay more tax on non-ISA investments than you did in the past. Fortunately, if it is introduced, the new British ISA and the additional allowance it provides could help you mitigate a large tax bill.
Critics are concerned about a lack of diversification
The British ISA is still in the consultation stage so there are no clear rules about which investments qualify. However, the UK government made several suggestions in their policy document.
The new ISA would likely allow investors to purchase shares in any company that is incorporated in the UK and is either listed or permitted to share on a UK-recognised stock exchange – Aquis Stock Exchange, Cboe Europe and the London Stock Exchange (LSE).
Additionally, it’s been suggested that any collective investment vehicles would have to hold at least 75% of their funds in eligible UK companies.
Critics argue that this could lead to a lack of diversification and increase the potential for home bias.
For example, if you use your full £20,000 ISA allowance for non-UK investments, and the additional £5,000 in your British ISA, 20% of your total investment is in the UK stock market.
Yet, Statista reported that in January, the UK stock market only made up 3.7% of the total world equity market value. As such, investing 20% of your wealth in the UK markets each year could mean that you suffer from home bias and are overexposed to UK investments.
Additionally, investors are likely to favour companies that they believe will generate the most growth. As a result, the British ISA may simply encourage investment in a very small number of already successful UK companies, which would lead to a concentration of risk from a UK equity perspective in your ISA portfolio.
UK shares may not provide the same return as global markets but the British ISA aims to change that
As well as the concentration risk, critics have raised concerns about the comparatively poor returns from UK markets.
According to Corporate Adviser, the FTSE 100 returned average annualised returns of 5.2% between January 1984 and January 2024. In comparison, the US S&P 500 returned 9.1% and the MSCI Europe Index returned 7.8% in the same period.
As a result, many investors favour spreading their investments across global markets and avoid investing in the UK because the returns have often been lower in the past. Critics claim that the British ISA encourages sub-par investment strategies because it limits you to holding poorly performing UK-based investments.
However, there is another side to this argument.
It’s important to note that the British ISA was conceived to encourage investment in UK companies. As more people purchase UK shares, their value may increase, encouraging more investment from overseas.
Eventually, this could bolster UK shares and make them more competitive in global markets, meaning that investors might see higher returns from local investments in the future.
Our Chief Investment Officer believes this is a great reason to support the British ISA:
“There are occasions when government intervention is necessary to deal with certain market failures, and this is one of them. I believe this is a positive and necessary intervention to reverse the trend of poorly performing UK equities.
UK assets have suffered from unnecessary discounting due to long-term disinvestment. With retail investors and trustees of Final Salary Schemes chasing returns from global equities, they’ve been selling off their UK shares, which has led to reduced share prices.
This in turn, leads to poor performance, which leads to more selling, which leads to lower share prices, and the cycle goes on. The British ISA should help to drive away the discounting of UK shares, which could ultimately generate more wealth. To me, that makes perfect sense for the UK economy.”
So, while UK investments may currently offer lower returns for investors, there are two ways to potentially respond to the situation.
Do you shy away from UK markets and denounce the British ISA as a poor idea? Or do you embrace an opportunity to invest in local markets and attempt to make them competitive again, potentially increasing your own returns in the future?
Get in touch
The British ISA may or may not happen in the future. In the meantime, we can discuss other tax-efficient savings and investment options with you.
Email hello@fcadvice.co.uk or call 0333 241 9900.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term (minimum of 5 years) and should fit in with your overall risk profile and financial circumstances.
