British ISA: what assets could it include?

A Treasury consultation on the new British ISA is set to close in two weeks. We reveal the latest rumours of what will be allowed in the tax wrapper

Pound coins on top of image of Big Ben
(Image credit: Getty Images)

The Treasury is putting the final touches to its much-heralded British ISA as it looks to boost investment in homegrown stocks.

Chancellor Jeremy Hunt announced plans for a separate £5,000 ISA allowance during the Spring Budget in March that would focus on backing British companies.

The idea is to encourage investment in the UK stocks through a dedicated British ISA.

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This would be on top of the £20,000 annual ISA allowance.

It comes as the FTSE 100 hit a record high this week, suggesting the UK market is worth backing.

But its performance continues to lag other indices such as the S&P 500.

A consultation on how a British-focused tax wrapper would work is set to close in two weeks and the Treasury is already reported to be backtracking on some of the plans.

The consultation document suggests that British gilts and corporate bonds could be included but The Times has reported that these may not be allowed as it wouldn’t meet the goal of helping British equities expand.

Here is what you may be able to put into a British ISA.

UK shares and the British ISA

The main point of a British ISA is to help UK companies grow so shares are an obvious asset to be included.

Investors can already back UK equities through a stocks and shares ISA but would have an extra allowance to focus on British stocks.

“This approach would enable the UK ISA to support a range of UK companies, from small companies trading on the alternative investment market, to medium or large UK companies that are listed on the London Stock Exchange,” the Treasury consultation says.

“It could also support UK companies across a range of sectors such as construction, healthcare and technology.”

Funds and investment trusts in the British ISA

Similar to equities, there are also funds that back British stocks.

Using an investment fund may make it easier for investors to research and diversify as you can leave it up to the manager to choose the best stocks and balance the portfolio to manage risk and volatility.

Corporate bonds and gilts for the British ISA

It is already possible to invest in business and government debt through an ISA.

Many investors have flocked to bonds as interest rates rose but they may lose their shine if the base rate drops.

Currently, the Treasury consultation says that while the British ISA is focused on “supporting UK equity markets,” including bonds and gilts could give investors more choice.

But it is now rumoured that these will be dropped.

That is an approach that Ben Yearsley, director of Fairview Investing, agrees with.

“It makes sense making the British ISA equity only as the whole point is lack of equity funding,” he says.

“Therefore, banning gilts and bonds is fine.”

Cash holdings for the British ISA

It may be tempting to hold cash in a British ISA, as some other ISA products let you do, until you decide where to put your money.

Some investment platforms may even pay interest on cash until it is invested.

But the Treasury suggests that investors should be dis-incentivised from holding cash in the UK ISA, other than for the purposes of investing.

“Examples include applying the basic or other rate tax to interest on cash held within the UK ISA, not allowing interest to be paid on cash in a UK ISA, or having a de minimis amount for cash held in a UK ISA,” the consultation says.

Rachael Griffin, tax and financial planning expert at wealth manager Quilter, suggests restrictions such as a ban on the inclusion of bonds, gilts and a restriction on cash holdings would be detrimental to the effectiveness of the British ISA.

“Cash holdings within the UK ISA are necessary for providing liquidity and covering ISA manager charges and investment advice fees,” she says.

“During volatile market conditions, cash can act as a buffer to preserve capital and provide stability within the investment portfolio.

“While monitoring cash balances and issuing warnings to prevent the UK ISA from being used primarily as a cash ISA is advisable, imposing restrictions on cash holdings might be detrimental.”

Is a British ISA a good idea?

A lack of investment is often blamed for the poor performance of UK stocks.

It is all the more surprising given dividends among UK-listed companies tend to be high while some commentators highlight that shares are at large discounts based on price-to-earnings ratios.

The UK is trading at 43.5% discount to the US – based on 12 month forward price-to-earnings ratios, according to Hargreaves Lansdown– currently near the biggest discount to the US in more than 20 years

Hunt’s argument is that an extra tax-free allowance could boost investment

Hargreaves Lansdown, which has launched a campaign to encourage investment in the UK, suggests there is appetite for home-grown stocks.

The investment platform says 83% of shares held by its clients are in UK listings.

“Regardless of whether the British ISA gets off the ground, and if it does, it’s unlikely to be before 6 April 2025, we believe there is currently value in the UK market for long term investors,” says Emma Wall, head of investment analysis and research, Hargreaves Lansdown.

“Despite the FTSE 100 being at record highs, the UK stock market overall remains out of favour and unloved which presents opportunities for investors.”

Neil Shah, executive director of content and strategy at Edison Group, says the British ISA reflects a wider theme of incentivising investments in the UK, particularly as pension funds consolidate.

"While sceptics argue that investors might find better returns elsewhere and that the ISA's impact could be marginal, it nonetheless offers a valuable avenue for diversifying investments, potentially benefiting smaller businesses in the process,” he says.

But critics warn that the extra allowance could add unnecessary complexity to the ISA

“While the British ISA aims to bolster investment in UK equities, there’s a risk it could be perceived as a hasty policy move, adding layers of complexity to an already intricate ISA system,” adds Griffin.

“Any initiative that promotes the importance of medium to long-term savings and investing is worth exploring but it’s uncertain that the UK ISA will meet this policy objective.”

It is already possible to back British equities through the tax wrapper anyway, so the question is whether an extra allowance will address why people aren’t investing in these types of stocks.

Jason Hollands, managing director of Bestinvest says the product may only appeal to a small number who have already maxed out their £20,000 ISA allowances and may move money from the mainstream tax wrapper.

He suggests there are other sources of liquidity that could be used to support UK equities.

 “It probably will require a package of measures to breathe new life into the UK equity market,” adds Hollands.

 “One of which, in my view, should be the abolition of stamp duty on UK share purchases, since this puts the UK market at a disadvantage to the US which doesn’t have such a transaction tax. 

"Stamp duty is a particular deterrent to frequent traders, who play in an important role in providing liquidity.”

Marc Shoffman
Contributing editor

Marc Shoffman is an award-winning freelance journalist specialising in business, personal finance and property. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and The i newspaper. He also co-presents the In For A Penny financial planning podcast.