The British Isa: Will you use the new tax-free allowance – vote in our poll below
News of a British Isa has resulted in keen interest from This is Money readers since its announcement in last week’s Budget.
It will offer the chance to invest £5,000 a year tax free in UK assets, on top of the existing allowance to put £20,000 in cash or shares in each tax year.
Investors can of course allocate as much of their current Isa allowance as they like now to homegrown businesses, subject to none of the restrictions that might eventually be placed on what goes into a British Isa.
The British Isa plan is under consultation, then rules will need to be finalised and providers given time to create new products.
Therefore, the earliest likely launch date is thought to be April 2025.
That puts it on the other side of the pending general election, which has to be held by January 2025 at the latest.
However, if Labour wins it’s unlikely to throw out a ‘patriotic Isa’ aimed at boosting UK growth as one of its first acts in government.
Shadow Chancellor Rachel Reeves has already expressed similar sentiments to present incumbent Jeremy Hunt on using people’s pension savings to support the economy, and is expected to continue with some version of that plan should she succeed him.
> The British Isa: Everything you need to know – from when it might arrive to what investments count
Will the British Isa be popular?
‘Anything that increases the amount people can invest tax efficiently should be broadly welcomed in these taxing times,’ says Jason Hollands, managing director of Bestinvest.
‘But an increase in the core Isa allowance, which has been frozen at £20,000 since 2017/18, would have been far more preferable than yet another type of Isa with a restricted range of investments.
‘A relatively modest number of people fully utilise their existing £20,000 allowance and a logical step for those who will be in a position to do so and also make use of the “British Isa” will be to commit less to UK equities in their main allowance to compensate.’
Meanwhile, Hollands says people wanting to invest in UK equities do not need to wait for the British Isa, which is likely to be a year away, if it happens given there will be an election.
‘There are good reasons to consider investing in the UK given the opportunities provided by incredibly cheap valuations, high dividend yields and the rising number of share buybacks being announced by companies which could help kick-start the market.’
Is the UK a ‘buy’ right now?
‘Investors aren’t likely to want to buy into the UK stock market on the basis of past performance,’ says Laith Khalaf, head of investment analysis at AJ Bell, says. ‘UK plc does have some attractive features though.’
‘The first is the market comes with a pretty cheap price tag. The UK is also an attractive place for income seekers because of the high level of dividends paid by the market. UK smaller companies are also worthy of a mention.’
Khalaf says there are broadly three approaches to determining your UK exposure: passive, active, and patriotic.
Passive: Invest in line with global stock market benchmarks, which means around 4 per cent of your portfolio should be invested in UK stocks.
Active: Manage your regional allocation, with one starting point holding 20 per cent in each of the UK, US, Europe, Japan and Emerging Markets, then adjusting depending on your confidence in each market.
Patriotic: Bung everything in the UK, tethering your fortunes entirely to those of the home stock market.
Khalaf notes the last strategy would have meant missing out on big returns in recent years.
‘Over the last decade an investment into the UK stock market would have turned £10,000 into £16,469, compared to £31,207 from global shares (total return to 6 March 2024).
‘That doesn’t tell us what future returns will look like of course, but it does highlight the danger of allocating all your money to just one region.
Laith Khalaf: It’s questionable whether patriotic loyalty is rewarded when some of the biggest companies in the market aren’t terribly British
‘It’s also questionable whether this loyalty is rewarded when some of the biggest companies in the market aren’t terribly British, such as Antofagasta, a mining company operating predominantly in Chile, or HSBC, a global bank which derives 80 per cent of its profits from overseas.’
Khalaf’s UK fund and trust tips are below, but he also suggests considering a ‘core and explore ‘investment strategy’.
This involves starting with a global tracker fund like Fidelity Index World (Ongoing charge: 0.12 per cent) to provide a basic level of diversification, then being more exploratory by picking a few stocks for your portfolio.
‘This allows you to get involved in choosing your own companies while also keeping the amount of time you have to spend researching at a reasonable level. It also helps you sleep at night knowing that a profit warning from one company isn’t going to have a disproportionate effect on your wealth.’
Back the UK or keep your options open?
John Moore, senior investment manager at RBC Brewin Dolphin, says: ‘We don’t know the exact details of the British Isa, but if we take it at face value and assume it is an opportunity to shield investments in any UK-listed companies from tax, then there are a couple of options.’
If you’re less sure about the UK’s prospects, you can look at London-listed but internationally-focused businesses, he says – find Moore’s stock tips below.
‘You can still gain exposure to the global economy through companies listed on the large-cap FTSE 100 index. Estimates put the share of revenues that come from overseas for all of these businesses at around 75 per cent, with the remainder derived from within the country.
‘There are some world-class companies in their respective sectors listed in the UK, which offer a blend of capital growth and income potential – both of which enable compounding of returns over time that would be free of tax within the Isa wrapper.’
Moore says the alternative is to back a UK recovery by getting behind the spirit of British Isas and using your allowance to invest in domestic companies.
John Moore: You can still gain exposure to the global economy through companies listed on the large-cap FTSE 100 index
‘A lot has already been made of the differential between historical returns from the UK market and the global indices – however, as Japan has shown recently, there is something to be said for sticking with some countries and being patient.
‘With a few exceptions, the best way to play the UK is through collective investment vehicles such as open-ended funds or investment trusts. These provide you with access to a basket of UK companies, which can help to spread risk and provide exposure to a range of different sectors.’
Laith Khalaf tips…
City of London (Ongoing charge: 0.65 per cent)
This trust benefits from having had Job Curtis at the helm since 1991, with a focus on dividend growth and quality, largely from the large cap segment of the UK stock market, he says.
The trust is one of the Association of Investment Companies’ dividend heroes, having raised its income distribution since 1966, the last time England won the football World Cup.
Fidelity Special Values (Ongoing charge: 0.70 per cent)
Fund manager Alex Wright is a contrarian investor, looking for unloved or overlooked companies that are set to stage a recovery.
This can be a higher risk approach, but the fund is well diversified with over 100 holdings, and invests across the market cap spectrum.
WS Amati UK Smaller Companies (Ongoing charge: 0.86 per cent)
Dr Paul Jourdan has been running this fund for over 20 years and the whole team is steeped in experienced when it comes to small cap investing. They look for high quality companies with competitive advantages.
They have an emphasis on the AIM market, but they can invest in stocks all the way up to the FTSE 250.
Man GLG Undervalued Assets (Ongoing charge: 0.9 per cent)
Run by Henry Dixon, this fund invests across the UK stock market in companies of all sizes, which the manager believes are undervalued. This leads it to be heavily skewed towards more cyclical areas of the market.
Vanguard FTSE 250 ETF (Ongoing charge: 0.10 per cent)
With an annual charge of just 0.1 per cent, this ETF offers investors a cheap and cheerful way to gain exposure to the UK’s medium-sized companies, a segment of the UK stock market which has performed well historically, and has a more domestic economic focus than the big blue chips of the FTSE 100.
Jason Hollands tips…
Artemis UK Select (Ongoing charge: 0.55 per cent)
This is a ‘best ideas’ UK equity fund managed by Ed Legget and Ambrose Faulks, which has the flexibility to roam across the UK market-cap spectrum, uninhibited by benchmark weightings though it is typically heavily focused on companies in the FTSE 350 index of large and mid-cap stocks rather than smaller companies.
The managers seek out companies they believe have good earnings growth prospects but where they believe the current valuations are too conservative and therefore have the potential to be rerated. While the fund isn’t a dogmatic ‘value’ fund that is solely focused on cheap shares, it does have a modest value style bias.
Fidelity Special Values (Ongoing charge: 0.70 per cent) – also tipped above
This investment trust is the sister to the Fidelity Special Situations fund and its shares can currently be snapped up on a -8.5 per cent discount to their net asset value (see the box below for an explanation of NAV).
The managers seek out unloved companies with the potential for positive change. This can mean companies that have seen a new management team join, which are undergoing a turnaround, have been hit by worries about regulatory disruption or where the competitive environment is improving.
Liontrust UK Growth (Ongoing charge: 0.82 per cent)
This fund, managed by duo Anthony Cross and Julian Fosh, has a similar strategy to their larger Liontrust Special Situations fund, but with a focus on large and medium sized companies and without high exposure to smaller ones.
The team employ an investment philosophy they call the ‘Economic Advantage’ approach which looks for companies that can continue growing their earnings throughout the economic cycle and have qualities that provide high barriers to competitors and strong control over their pricing such as ownership of unique intellectual property, high recurring revenue streams and hard to replicate distribution channels.
Temple Bar Investment Trust (Ongoing charge: 0.92 per cent)
Temple Bar is managed by Ian Lance and Nick Purves of boutique manager Redwheel who are veteran ‘value’ investors. Their approach is to target attractive companies that can be bought at deep discounts to their ‘intrinsic value’, which factors in the true worth of a company – including its assets and brand – not just its earnings.
Jason Hollands: Anything that increases the amount people can invest tax efficiently should be broadly welcomed in these taxing times
The managers have been vocal of late in highlight the scale of the opportunity available in UK equities, where valuations are at the widest discount to global equities in 40 years and encouraging companies themselves to take action by buying back their own shares to create shareholder value.
Temple Bar’s shares are currently available at a -7 per cent discount to their net asset value.
WS Evenlode Income (Ongoing charge: 0.87 per cent)
The approach is team based and focuses on backing cash generating companies able to grow their dividends.
They favour ‘capital-lite’ businesses, those which do not require heavy investment in wear and tear costs such as plant and machinery which can be a drain on shareholder funds, and therefore avoid areas like energy or airlines.
The fund takes a ‘buy and hold’ long term approach and is fairly concentrated in nature with less than 40 holdings.
John Moore tips…
Internationally-focused UK companies
A multinational business information and analytics company, which owns some of the top publications in each of its target segments and occupies a market-leading position in many of its areas of expertise.
It also has an exhibitions division that produces some of the best-known events in a range of sectors. RELX has grown significantly in recent years to become one of the FTSE 100’s largest companies and still offers a dividend of around 1.7 per cent for income-minded investors.
The group behind many of the world’s best-known names in alcohol and spirits, including Guinness, Tanqueray, and Johnnie Walker, selling more than 200 brands in over 180 countries.
While the company has been hit by tough trading conditions in Latin America and some of its other markets, there were signs in its last results that pointed towards a more positive medium to long term.
Diageo remains very strong and well-positioned to benefit from trends in the drinks and spirits industry, with ample room for growth in a highly fragmented market.
Chemicals company Croda has seen its share price fall significantly from its peak in late 2021 on the back of a rare profits warning.
Around 96 per cent of the group’s sales are outside of the UK, along with 80 per cent of its production, making it more or less a pure international play.
The shares may be down on their luck, but this presents a potential buying opportunity for patient investors, and there is a reasonable dividend of around 2.3 per cent for investors in the interim.
Provides credit scores to businesses and individuals in a range of markets, with most of its revenues derived from outside of the UK.
Whatever conditions are like in the economy, businesses want to understand the risk of lending to other organizations or to consumers, providing Experian with a degree of resilience.
Backing a UK recovery
Liontrust Special Situations (Ongoing charge: 0.81 per cent)
Liontrust Special Situations provides exposure to some of the UK’s largest companies at a reasonable price. The likes of BP and Shell are in the fund, alongside some mid-cap names too, with a bias towards growth opportunities that remain unrecognized by the market.
Fidelity Special Situations (Ongoing charge: 0.91 per cent)
Provides access to value and recovery plays, along with some overseas holdings for diversification. Compared to the Liontrust fund, it takes a more value-oriented investment approach, preferring businesses that are out of favor and where change can deliver good shareholder outcomes.
Top holdings include the likes of Swiss pharma group Roche, the insurer Aviva, and the outsourcing group Mitie.
Blackrock Throgmorton (Ongoing charge: 0.56 per cent)
Blackrock Throgmorton provides access to growth companies that could be tomorrow’s stars. Construction group Breedon, WH Smith, and pollster YouGov are among the top holdings.
Mercantile Investment Trust (Ongoing charge: 1.41 per cent)
Mercantile is focused on small and mid-cap UK companies. Housebuilder Bellway, Warhammer maker Games Workshop, and furniture retailer Dunelm are among the top holdings.
One of the UK’s leading mass-market savings firms and it will be responding to the UK allocation challenge amongst its existing and potential pension clients and has been developing long-term asset investment for some time.
The above-average yield of 8.1 per cent will also appeal to many within the tax-free environment of an Isa.
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