In his latest budget, the Chancellor announced a consultation on a UK ISA. This will offer a new ISA allowance of £5,000 in addition to the existing ISA allowance (£20,000) and will provide a new tax-free savings opportunity for people to invest in the UK.
This proposal is at consultation stage, so the finer details of the UK ISA are still to be confirmed and we also need to wait and see how product providers and investment managers are able to offer products for investors, but drilling down into the documents released alongside the budget speech, some of the key rules associated with the UK ISA that will be consulted upon include:
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- Eligible UK companies could be defined as ordinary shares in companies that are incorporated in the UK and are either listed on a UK-recognised stock exchange or admitted to trading on a UK-recognised stock exchange.
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- The government proposes that collective investment vehicles could be included in the UK ISA.
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- A previous approach to personal equity plans (PEPs) could be applied for funds. PEPs allowed investments in authorised unit trusts and/or investment trusts if at least 75% of the value of the investments held by the fund were invested in eligible UK companies.
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- The inclusion of UK corporate bonds and gilts within the UK ISA is also being consulted upon.
The idea of an additional tax-free allowance for investors will no doubt be welcomed; particularly given the substantial reduction we’ve seen in the capital gains tax (CGT) annual exempt amount (reduced to £3,000 for the 2024/25 tax year), as well as reductions in dividend (£500) and savings allowances (£1,000 for basic rate tax payers and £500 for higher rate tax payers).
However, whether this will achieve the objective of increasing investment into UK companies remains to be seen. Relatively few investors use their full ISA allowance every year so the number of people able to take advantage of this remains to be seen, particularly when the removal of the lifetime allowance and increase in annual allowance may make pensions a more attractive option for some.
We wait to see how ISA providers and investment managers will respond to this. The ISA rules are already quite confusing with several different types of ISA already available and whilst most platforms now offer a Flexible ISA (where contributions can be withdrawn and reinvested during the same tax year), some don’t offer Junior ISAs and relatively few chose to offer the Lifetime ISA. Depending on the legislation, we may find the range of providers offering this to be quite limited.
With regards to the merits of investing exclusively in the UK, given that when we talk about investing, we normally promote the benefits of diversification and “not having all of your eggs in one basket”, a UK only investment portfolio may not seem that appealing. Whilst the allocation to a UK ISA may initially only form a small part of a client portfolio, it will shift the overall asset allocation more towards the UK, a market that, whilst you could argue is relatively cheap compared to the rest of the world, doesn’t necessarily offer the same growth potential as other regions within a globally diversified portfolio.
Where advisers currently recommend solutions to clients which incorporate a UK bias, they may want to think about how a further specific allocation to the UK, impacts the overall risk and return profile of the client’s total portfolio. We may find that advisers and investment managers choose to dial down the UK exposure in core solutions to factor this in, in which case the net effect may well be that we don’t see much in terms of further investment into UK companies, to stimulate the growth the chancellor is hoping for.
In summary, whilst any additional opportunities to invest more tax efficiently should be welcomed, it remains to be seen how this will be implemented and the opportunities available for investors. However, the ability to take advice to ensure clients continue to take advantage of the tax allowances available to them, whilst investing in a suitable, diversified portfolio, will remain as important as ever.
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The content of this Budget summary is intended for general information purposes only. While we believe this interpretation to be correct, it cannot be guaranteed and may be changed in subsequent budget consultations. Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested.
