With the general election just two days away, some of the measures announced in Jeremy Hunt’s Spring Budget feel like a relic of the past.
One of the initiatives announced was the British ISA, an additional £5,000 tax-free allowance intended to boost investment in the UK economy. But with Labour comfortably ahead of the Conservatives in the polls, some might wonder whether this initiative is dead in the water.
The government held a consultation on the proposed initiative between 6 March and 6 June, however any noise around the new investment allowance disappeared into the furore of the election campaigns.
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The Conservatives (who initially proposed the new ISA) failed to mention it even once in their election manifesto.
Labour was also silent on the topic in its manifesto document, despite the fact that a party spokesperson previously told City A.M. the party had “no plans to drop the British ISA”. MoneyWeek has contacted Labour to confirm this report.
It could be as simple as other policies taking precedence in two already-long documents. Both parties have otherwise been clear in their commitment to boosting investment in domestic businesses.
That said, the British ISA was met with a limp reception after being announced several months ago. With this in mind, it is worth considering whether both parties’ silence on the topic reveals something more beneath the surface. Is it possible that the British ISA will be dropped?
What could a Labour win mean for the British ISA?
“I very much hope that the fact Labour hasn’t mentioned the British ISA in their manifesto, combined with their commitment to ISA simplification in their January policy paper on financial services, means it will now be consigned to the policy dustbin,” says Tom Selby, director of public policy at AJ Bell.
“While the aim of the British ISA – boosting UK capital markets – was laudable, the policy had more holes than a piece of Swiss cheese and would have been ineffective in achieving that aim,” he adds.
The proposal from the government was that savers would get an additional £5,000 tax-free allowance each year that they could invest in UK assets.
The exact parameters of the vehicle have not yet been defined, but investments could include UK stocks, UK equity funds, corporate bonds and gilts.
MoneyWeek recently looked at what could potentially be included in the British ISA, if it goes ahead.
One of the main drawbacks is that the proposal complicates an already-intricate ISA landscape. It could also encourage investors to concentrate a large portion of their portfolio in UK assets, rather than diversifying more broadly.
“The new government needs to go back to the drawing board by focusing on ISA simplification for the benefit of savers and investors,” Selby says. He suggests this could be achieved by increasing the overall ISA allowance to £25,000.
He adds: “This combination of changes would be much more likely to achieve the policy goal of boosting UK capital markets (as investors tend to exhibit a natural ‘home bias’ for UK investments) without layering on unwelcome complexity.”
Will the British ISA work in boosting investment into the UK economy?
In an “excessively optimistic scenario”, the British ISA would deliver around £4 billion of inflows into UK equities, according to Laith Khalaf, head of investment analysis at AJ Bell.
“Based on the current run rate, that would just about cover three months of retail outflows from UK funds,” he adds. Indeed, despite a decent year for the FTSE 100, the latest data from the Investment Association reveals UK investors pulled £1.3 billion from UK equity funds in the month of April alone.
But that’s not the only problem. As Rachael Griffin, tax and financial planning expert at Quilter, points out, the vast majority of savers don’t exhaust their existing £20,000 ISA allowance anyway.
She says: “An additional £5,000 to invest in UK companies is unlikely to scratch the surface, and will do very little to alleviate the pains the London stock market is going through just now.
“The reality is, the UK has a cash savings problem and too much money is sat in low-yielding cash ISAs, doing very little to help [savers] or the economy. Finding ways to get that money invested for the long term would be far more beneficial.”
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