What is the British ISA?

One of the more intriguing elements of the Spring Budget was the announcement of a new British ISA, a proposed additional £5,000 allowance exclusively for UK investments.

The sentiment behind the British ISA is laudable. The shareholder culture among the UK population has been waning, and simultaneously there has been less attention from institutional investors over the past few years, both at home and overseas. It has led to a dearth of new listings, as well as low market values that have attracted opportunistic takeovers by trade buyers, often from overseas.

Combined, these trends mean the number of companies listed on the market is shrinking, and a reversal in fortunes is important for the City and for the economy as a whole.

British ISA details: what do we know so far?

1. There is some way to go before British ISAs are on the market

Although the proposal of a ‘great British ISA’ has attracted a lot of news stories, it's important to note this is merely an intention at this stage, and not set in stone.

The design and implementation are subject of a consultation with industry and others, which ends in June, and it may require the agreement of a future government to put into action. If it does get the green light, it's unlikely to be available until the 2025/26 tax year. In the meantime, we have more questions than answers about how the British ISA will work, as well as some doubt as to whether it will happen at all.

2. Some uncertainty around British ISA rules

One of the key questions the consultation should seek to address is around what constitutes a UK investment. Some UK listed companies derive a large part of their earnings from overseas, in certain cases all their earnings.

It's hard to argue that such companies represent investment into the UK economy. However, they do form part of its capital markets, so their liquidity – or ease of trading – and their relative valuation in the context of global markets is important as it may influence the overall attraction for other companies when they are considering where to list their shares.

Efficiency and recognition are two important attributes in this process, and some important UK companies have eschewed their home market recently. For instance, computer chip designer Arm Holdings opted for America’s Nasdaq exchange last year, thus denying the UK market a rare domestic tech success story.

There is also the question of whether funds or investment trusts should be included. Confining the British ISA to shares could mean investors having less diversification and taking on more risk than is suitable. If funds were included, they would provide a convenient spread, though there would then be a need for a minimum level of UK assets to be set to determine eligibility.

Another aspect to be considered is the added complexity to the ISA rules a new UK ISA would bring. We already have a mind-boggling array of different ISA types, each with their own set of rules, that can be difficult to comprehend. Another product could add to the confusion.

3. The British ISA allowance may only have limited benefit for the UK market

Only about 15% of ISA subscribers contribute the maximum £20,000 available, some 1.6m people.

Even if all these individuals invest an additional £5,000 exclusively in UK equities via a British ISA - a generous assumption as over 40% of these people currently just use a Cash ISA - that’s an additional £8bn a year flowing in. In other words, only around 0.25% of the market’s aggregate value of £3trn.

Furthermore, investors with larger existing portfolios could simply prioritise the British ISA for their UK exposure and free up space elsewhere for other investments, so in reality the impact would likely be much less.

We can't, therefore, expect the British ISA in its proposed form to significantly increase the flow of capital into the UK market on its own. Far greater impact might be achieved through a raft of measures, for instance by corralling institutional money, including large pension funds.

Will the British ISA work for investors?

For investors, more wealthy individuals happy to tolerate the possibly greater risks will welcome an extra allowance and the ability to further obviate reductions to capital gains tax and dividend allowances that kick in from the start of the new tax year in April. Although increasing the overall £20,000 a year allowance to £25,000 would arguably be a simpler and more expeditious route, and a proportion of this would naturally find its way into UK stocks anyway.

The British ISA plan will likely come with strings attached, though. The existing ISA rules allow transfers between different types, and it’s unlikely the same flexibility would apply.

Probably the workable solution is to have a separate British ISA account with a prescribed list of eligible investments that can't be moved to any other ISA type. Otherwise, people could just transfer away to circumvent the investment restrictions. And if it were to be somehow tacked onto the existing Stocks & Shares ISA, the monitoring of an investor’s proportion in eligible UK assets following buying and selling activity would become fiendishly complex.

Overall, we applaud the sentiment around the British ISA. Re-invigorating London’s capital markets to the benefit of the UK economy is most welcome. There will also be no complaints from investors presented with the option of an extra ISA allowance to use, but could there be a simpler way to embed a deeper shareholder culture in the UK and encourage greater flows from investors?

If the Chancellor wanted to whet their appetite, as well as provide a more straightforward solution than adding to an already cluttered ISA landscape, then removing stamp duty on UK share transactions, or even cutting, or otherwise modifying, capital gains tax for UK listed stocks would be worth considering.