Is the UK ISA doomed to failure?


When Chancellor Jeremy Hunt announced the UK ISA in the Budget, speculation began on what investments might be allowed inside the additional £5,000 allowance. At present it remains a half-baked idea to encourage more investment in UK equities, with a consultation on the design of the UK ISA running until June.

The consultation document suggests that a UK ISA might look a little like the Personal Equity Plans launched in the 1980s, which were UK shares only. However, it also suggests the UK ISA could be allowed to hold UK-listed shares, funds that invest in UK shares, retail bonds and gilts. The devil will be in the detail.

Potential issues to iron out include whether large FTSE 100 companies that receive most of their revenue from overseas would be included. Also, while the consultation mentions the creation of eligible funds, there was no mention of investment trusts, a type of collective investment that already trades on the UK stock market. Although UK-listed, many investment trusts invest globally with only 130 being purely UK-focused.

The monitoring of investments within UK ISAs may be difficult too, incurring expenses for advisers and platforms who would be required to monitor the portfolios within the UK ISA. Additional costs would be passed on to the end investor, perhaps negating some of the benefits of the additional £5,000 allowance.

Another tax subsidy for the wealthy?

However, many think the consultation work may be in vain. UK ISAs are unlikely to be used by the majority of the public, who already struggle to fill their current annual £20,000 ISA allowances. The latest annual government savings statistics show investors subscribed to 11.8mn adult ISA accounts in 2021-22. But the average contribution to a stocks and shares Isa was just £8,690. Only 15 per cent of subscribers saved at the maximum annual £20,000 limit, rising to 39 per cent of those with income of £100,000 to £149,999, and to 61 per cent of those with income of £150,000 or more.

No wonder many commentators view the UK ISA simply as a big tax subsidy for the wealthy.

Of course, savers don’t need to wait until the UK ISA is launched to buy £5,000 of UK shares in an ISA wrapper. In theory, investors can invest all of their £20,000 ISA allowance into the UK stock market, but that’s putting a lot of eggs in one basket.

Home bias

The platforms report that although UK funds have fallen out of favour in recent years, investment in individual UK stocks by DIY investors is still very common. However, the investment industry has spent years educating investors not to have too much of a home bias and that good asset allocation involved diversification overseas. Many point to the MSCI World index of global shares, which includes large and medium-sized companies across 23 Developed Markets countries, and only has a 3.5 per cent weighting to UK shares.

Others warn that tethering your fortunes entirely to those of the UK stock market would have meant missing out on big returns in recent years. AJ Bell calculates that over the decade to 6 March 2024, an investment into the UK stock market would have turned £10,000 into £16,469 on a total return basis, compared to £31,207 from global shares.

Consumer outcomes

Some advisers and providers have expressed concerns that the UK ISA could raise challenges under the Financial Conduct Authority’s new Consumer Duty. Even for people with the means to use the full stocks and shares ISA allowances, increasing exposure to UK equities rather than a more geographically diversified portfolio, may be inappropriate for their investment goals and risk appetites.

The lack of enthusiasm is understandable. The design of the UK ISA is unlikely to be the ‘perfect product’ that works for all investors so providers who do choose to offer it may be criticised for its flaws.

Lukewarm interest

Whether enough product providers will launch UK ISAs to make it a competitive market remains unknown. The government is certainly reliant on providers’ good will and compliance to make the new allowance a success.

Some platforms, have expressed a distinct lack of enthusiasm. AJ Bell said the UK ISA is “doomed to fail” in its objective of boosting UK plc and will have no impact on investor behaviour. Michael Summersgill, chief executive at AJ Bell, said, “For most people, the British ISA only adds an unwelcome complexity. People will now have another option to evaluate when deciding which ISA type is right for them.”

If the aim is to boost investment in UK companies, many believe answer lies elsewhere. AJ Bell recommends extending the existing Alternative Investment Market exemption from stamp duty and/or inheritance tax to a wider pool of UK assets would actually have a meaningful impact.

Meanwhile, rival platform interactive investor believes abolishing the stamp duty on UK shares and investment trusts, which penalises investors who buy British, would have been an effective way to nurture UK share ownership, putting them on a level footing with other markets. This is especially relevant as the UK grapples to maintain its competitiveness as a place for companies to not only list, but also to scale. Richard Wilson, CEO at interactive investor, says: “Removing the stamp duty barrier would be a critical step towards creating a more inviting investment landscape. We will continue to urge the Government to give this the attention it deserves.”

Next steps

If you’re itching to use an extra £5,000 ISA allowance, be prepared to wait a while. There’s no firm time frame on a launch date for the UK ISA.

If the government stays in power it may take until April 2025 to see a UK ISA available to buy. But with an election on the horizon and no Labour commitment to the UK ISA, Jeremy Hunt’s big idea to revive investor interest in UK plc might never come to fruition.

Photo by Roberto Catarinicchia on Unsplash