Beware the British ISA

Rishi Sunak and Jeremy Hunt, the Chancellor, are reportedly split over proposals to introduce an additional ISA allowance specifically for investment in British companies.

• It’s understood that even if a British ISA was introduced, the changes would not come into force until 2025-26 tax year.
• Incentivising the flow of money into UK-listed companies via a specific, ringfenced tax wrapper would add unnecessary complexity and could have unintended consequences.
• It could end up increasing risk for investors or failing to achieve its aims altogether.
• As an alternative solution, an increase in the overall ISA allowance would boost UK companies anyway and continue to enable sensible diversification.
• Around 1 million of HL’s 1.8 million clients trade on London markets, accounting for 80% of trades in the last year.

Susannah Streeter, head of money and markets, Hargreaves Lansdown:

‘’The economy is clearly in need of an injection of investment to help drag economic growth out of a stupor, but mooted plans for a British ISA to help direct investors’ money into UK-listed companies adds unnecessary complexity, could fail to achieve its aims, and could have a negative impact on UK investors.

It’s not surprising there appears to be scepticism about the plan right at the heart of government. A separate British ISA might end up providing no additional boost to UK investment. Those who already max out their £20,000 ISA allowance could simply hive off all their existing UK holdings to the British ISA, and use the extra wiggle room to invest more overseas in their usual ISA.

If it does persuade people to invest more in the UK, it could end up increasing risk for investors. It could unnecessarily concentrate portfolios, which could be a detriment, especially if there was more volatility in the London markets compared to others.

Many people are sitting on excess cash savings, which could be deployed into providing capital for listed firms, with the potential of delivering longer-term returns for the economy and individuals. However, boosting the overall ISA investment allowance would help do this without limiting the potential for diversification, and without adding another layer of rules. ISAs are a great product which help get people investing, so instead of adding complexity into the landscape, we should focus squarely on building people’s confidence in investment.

It is worth noting that UK retail investors are already enthusiastic backers of firms listed on the London Stock Exchange.  Currently around 1 million of HL’s 1.8 million clients trade on London markets, accounting for 80% of trades in the last year, with around 70% of investors holding at least part of their position in a company for more than 12 months. So, simply lifting the ISA allowance, without creating a new product, would result in a boost to investment in UK equities anyway. It would also still offer the potential for diversification, helping bolster retail investors’ resilience. Not putting all your eggs in one basket is one of the golden rules of investing, and it’s crucial that government policy continues to support that.’’

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