While Rishi Sunak and Keir Starmer are focused on finding political dividing lines ahead of the 4 July general election, the Conservatives and Labour are pretty much in lockstep over the need to boost UK capital markets as part of wider efforts to increase productivity.
The British ISA put forward by the government before the general election was meant to help shift the dial on that front. However, the proposal risks causing more harm than good over the long term by creating extra complexity for ISA investors.
What’s more, our research shows that when presented with the choice of a British ISA or a Stocks and Shares ISA, almost a third of potential investors would opt for the British ISA for their first subscription – despite the fact they could access identical investments and more besides for the same price in a Stocks and Shares ISA. This would be a poor consumer outcome and means firms would almost certainly need to wrap any British ISA in risk warnings to comply with the FCA’s Consumer Duty rules.
As investors tend to naturally favour UK investments anyway, it would be much simpler to increase the overall ISA allowance to £25,000, a move which would likely achieve similar results to a British ISA but without the extra complexity.
The case for simplification
Given the Conservatives and Labour have both committed to ISA simplification, it is hard to understand how creating a new, complex ISA fits in with that goal. Ahead of the publication of manifestos, both major parties need to reflect on the obvious problems with this idea and go back to the drawing board, with a clear-eyed focus on long-term reform.
AJ Bell has long campaigned for the ISA landscape to be simplified by combining the best features of the existing six types into a single ‘One ISA’. As a first step, the next government should look at merging Cash and Stocks and Shares ISAs, the two main ISA products used by investors.
This move which would make it simpler for investors to shift between cash and investments and move us towards a world where investments are simply a feature of ISAs, rather than a defining characteristic.
Eight major challenges facing British ISA plans
1. Additional complexity risks deterring potential new ISA investors
The extra complexity created by any British ISA will inevitably cause confusion, particularly among potential new investors. AJ Bell research shows the complexity of the current landscape – where there are already six versions of ISAs – acts as a barrier to investing and risks undermining the successful ISA brand.
Despite 71% of UK adults saying they are familiar with ISAs, fewer than a third (29%) know the current adult ISA allowance is £20,000. This falls further for women to 26% and further still for young adults aged 18-34 (19%).
Furthermore, half (49%) of UK adults think the different versions of ISAs make them too complicated. Although Cash ISAs had some recognition, fewer than half of UK adults could recognise the other types.
Financial advisers have similar concerns. AJ Bell research shows the vast majority of financial advisers support ISA simplification. Two-thirds (65%) believed unnecessary complexity had crept into the ISA market, and 8 in 10 (77%) thought this was down to ‘too many variants and names’ for ISA products.
2. The impact on UK capital markets will be extremely limited
While the aims of the British ISA – namely boosting UK capital markets and ultimately economic growth – are laudable, the policy simply will not achieve its stated purpose. The main ISA product already enables people to invest in UK companies in a tax efficient manner. Therefore, the only people who would have any need for a British ISA are those that regularly utilise all of their annual ISA allowance. Even if every person who subscribes £20,000 to a Stocks and Shares ISA were to open a British ISA and invest the full £5,000 allowance, it would generate a maximum of £4 billion a year for UK equities. In the context of a £2 trillion+ UK stock market, this is a drop in the ocean in relative terms.
3. Behavioural shifts will further dampen any boost to UK plc
In reality, the impact will likely be much smaller. Not all investors who subscribe £20,000 a year to their ISA will use the product, and many investors who do will adjust their asset allocation in the rest of their portfolio to maintain the same overall UK exposure.
4. The consumer harm risk
The negative impact of extra complexity isn’t the only material consumer risk posed by the British ISA. Independent research commissioned by AJ Bell* shows that, when presented with the choice of a British ISA and a Stocks and Shares ISA for their first subscription of the tax year, more people chose the British ISA (35%) than the Stocks and Shares ISA (26%). Given investors could access a much wider range of investments in a Stocks and Shares ISA – allowing greater global diversification – choosing a British ISA for your first subscription would almost certainly be unwise. Under Consumer Duty, providers would therefore inevitably be required to deliver warnings to customers to mitigate the risk of foreseeable harm.
*Based on a nationally representative survey of 2,000 UK adults carried out online on behalf of AJ Bell by Opinium between 7 and 10 May 2024.
5. How exactly would ‘UK’ be defined in a British ISA?
To create a British ISA, government will have to decide what qualifies as a ‘UK’ investment. This should be relatively simple for direct equities on listed stock exchanges but becomes much more difficult for collective investment vehicles like funds and investment trusts. In the original consultation document, the government suggested the ‘Personal Equity Plan’ regime from the 1990s could be used, with only funds which invest at least 75% in UK holdings qualifying.
If this model were adopted, there would need to be a mechanism in place to monitor allocations to UK companies/funds. Where an investment in a British ISA becomes non-qualifying, HMRC would need to decide on the approach taken in relation to that investment. If this monitoring process is overly onerous, product providers may simply decide any British ISA is not worth the hassle.
Government will also need to make a decision in relation to the policy intent. If the aim of the British ISA is primarily to boost UK stock markets, such as the London Stock Exchange, then it may want to allow listed instruments, including Exchange Traded Funds (ETFs) and investment trusts, to qualify for British ISAs. However, many of these vehicles – and indeed many major listed businesses – have a limited stake in the UK.
The Scottish Mortgage Investment Trust, the largest investment trust on the market and a FTSE 100 member, holds just 3.2% in UK listed shares. Equally, Antofagasta, a London listed copper mining company, conducts most of its business in Chile. It is hard to make the case for including either of these companies in the British ISA while excluding the other.
However, if investment trusts and UK equities on qualifying indices are deemed to qualify for a British ISA, one could make the argument that it would be unfair not to include similar investment funds that are not listed on an exchange. Given the challenges in identifying qualifying investments for a British ISA, it would be significantly simpler to increase the overall ISA allowance to £25,000, which would likely achieve very similar outcomes.
6. Should investors be allowed to transfer out of a British ISA?
In an ideal world, if a British ISA is to be introduced, it would be slotted seamlessly into the existing ISA framework, with similar rules on subscriptions and transferability. However, the additional £5,000 overall annual subscription limit granted through the British ISA means allowing transfers out would leave the system open to being gamed.
Savers could, for example, simply max out their British ISA subscription and then transfer their funds to a Stocks and Shares ISA, thus benefitting from a £25,000 overall subscription limit (rather than the usual £20,000 for a Stocks and Shares ISA), without ever having to expose a certain amount of their funds to UK investments.
It is therefore hard to conceive of a situation where transfers out of a British ISA are allowed.
7. Should investors be allowed to transfer into a British ISA?
This creates a further challenge in relation to transfers into a British ISA. If transfers were allowed into British ISAs from other types of ISA but savers were barred from transferring out of the UK ISA world, there is potential for consumer detriment. For example, if an investor chose to transfer their entire Stocks and Shares ISA portfolio to a British ISA, they would effectively be locked into the British ISA. As consolidation is often a key reason for transferring existing ISAs, this is not an unrealistic scenario.
Given exactly the same investments in a British ISA would already have been available to the investor in their Stocks and Shares ISA – not to mention a range of non-UK investments which could help them diversify their portfolio – this is unlikely to be a ‘good outcome’ and could potentially be viewed as ‘foreseeable harm’. Allowing transfers to British ISAs from other types of ISA would therefore risk undermining the FCA’s Consumer Duty.
8. The cash conundrum
Given the aim of the British ISA is to funnel investors towards UK-listed companies and funds, the government is understandably keen to discourage people using the vehicle to hold cash. Proposals put forward in the consultation include banning the payment of interest on cash or taxing cash interest payments.
Having different rules regarding the payment of interest on cash for British ISA investors versus other ISA investors risks creating unnecessary complexity and undermining the core principles of the FCA’s Consumer Duty regulations. Regulated firms are also already required to give warnings to customers who hold large amounts of cash over a certain period of time.
Disclaimer: The value of investments can go down as well as up and you may get back less than you originally invested. Past performance is not a guide to future performance and some investments need to be held for the long term. Tax treatment depends on your individual circumstances and rules may change. ISA rules apply. These articles are for information purposes only and are not a personal recommendation or advice.
