A few months ago, I was sent some details on a new book by Guy Thomas called Free Capital: How 12 Private Investors Made Millions on the Stock Market. It tells the encouraging story of how a group of ordinary retail investors made small amounts of money into large amounts of money by clever investing and looks at what their strategies had in common.
The answers are not particularly surprising. They tended to focus on smaller companies. They had saving personalities – long histories of giving high priority to “learning, earning, saving and investing.” They lived modest lifestyles, seeing “money as a means to freedom, not consumption.”
They kept their risks low by avoiding leverage. Finally they saw investment as a “craft not a science” – they used relatively simple analysis and rules and avoided all academic investing theory on the basis that too much study would be like “learning physics to play snooker” as one put it.
This all sounds good, but there are two more elements that need noting. One is luck – all good returns have a huge element of this involved. The second is tax avoidance, something that half of the case studies used to make their money work for them. Six of the 12 were Isa millionaires: they made their fortunes in part because they were able to pay no capital gains tax (CGT) and no income tax on their returns.
You might be impressed (as I am). But if the think tank Social Market Foundation (SMF) has its way, this way to wealth will be closed off and those who have large amounts of money in Isas already, will be in for a very nasty shock.
Have a flick through this report from the group and you will soon see why. Most of it isn’t particularly controversial. Indeed it represents almost a left/right consensus in its general ideas.
It says the UK government must continue to cut the deficit, and one distant day, the national debt too. It says that it must also do something about growth. It says that means radical action. It says radical action involves changing the tax-and-spend make up of the economy – shifting it so that consumption and investment rise.
Then it suggests ways of making large savings in order to release cash to redirect towards growth policies (by which it means infrastructure spending).
So far, so much discussed (and not so radical). The same goes for most of the proposals: SMF wants to cut tax relief on pensions for higher rate taxpayers; it wants to shift child benefit payments into the tax credit system; it wants to cancel free travel for over 60s; and it wants to axe the winter fuel allowance and free TV licences for all but the very poorest pensioners.
I’m not sure I agree with all these, but they aren’t exactly new thoughts. But then there is a blinder. SMF wants to cap all Isas at £15,000. Not cap contributions, but cap the total amount you can have in an Isa. At the moment, well over 20 million people have Isas. Two thirds of those people have more than £15,000 saved in them. SMF doesn’t like that.
Why? Because people with £15,000-plus in savings are exactly the kind of people it thinks have what it calls “financial headroom” and should therefore be encouraged to consume rather than be subsidised to save. Uncapped Isas are to SMF “expensive giveaways that drain demand from the economy and reinforce domestic household imbalances.”
This is an odd one. I can see you could make an argument for setting some sort of future limit (as has been the case with pension pots) if you really believed that the problem with the UK economy is that its population refuses to consume enough, or if you wanted to prevent the rise of too many Isa multi-millionaires.
But retrospectively capping Isas at a very low level and bringing back into the tax system the hard-won savings of 23 million UK adults seems like an extraordinarily destructive thing to do. It would cause unbelievable admin trouble for everyone; investors and taxmen too – most people barely invest outside an Isa because they can’t cope with figuring out income tax on dividends and the like.
I’m also not sure it would necessarily work to increase consumption much: at times like this, people are as likely to save more to make up the difference lost as they are to risk their personal futures by running down their financial security blankets in response to tax changes.
But more importantly than all that, this plan would break the implicit contract the government has with the population not to indulge in retrospective rule changes.
You could say that taxing Isa money is effectively to introduce a wealth tax, and that all wealth taxes break a political contract of some kind (if there is no tax on big houses when you buy a house, is it fair for a state to impose one later?).
But wealth taxes, as the British tend to understand them at least, are designed to hit only a small percentage of society. Capping Isas goes for the jugular of almost every saver in the UK. There is already very little trust to spare between leaders and electorates here. This wouldn’t exactly help with that. It is a very bad idea in a relatively reasonable report.