The new “British ISA” – what is it and why is it important?
In March 2024, the government announced the introduction of the UK ISA, which will provide a new tax-free savings opportunity for savers to invest in the UK, while supporting UK companies. Here we examine what we know about this extension to the highly successful, tax-efficient Individual Savings Account (ISA) and explain why we believe it could be important for UK investors.
What is the British ISA?
In the 2024 Spring Budget, Chancellor of the Exchequer, Jeremy Hunt, announced the introduction of the UK ISA. This represents an opportunity for investors to shelter a further £5,000 from the tax authorities annually, on top of the existing £20,000 annual ISA allowance, as long as this additional amount is invested in the UK.
As is typical with new policies, the concept is currently under “consultation”, which means the investment industry and other interested parties can help shape the precise design and implementation of the policy, making it fit for purpose and as effective as possible.
One key debate revolves around the exact definition of what should be considered a “UK company”. The proposal suggests that any business that is incorporated in the UK and listed on the UK stock market should be included. However, some industry commentators have argued that the policy should exclude companies that conduct most of their activities overseas. That would mean, the argument goes, the impact of the policy can be more directly focused on British businesses and the broader UK economy.
Meanwhile, the qualification of investment trusts will also require clarity. These are listed on the UK stock market, but many of them are focused on investment opportunities elsewhere in the world. For example, BlackRock manages a range of nine investment trusts, but only three of these are specifically focused on opportunities in UK equities.
The consultation process comes to an end in June 2024, so we don’t have long to wait for these finer details. In the meantime, we know that the Association of Investment Companies (AIC), the industry body that represents and promotes the investment trust sector, is calling for all UK-listed investment trusts to be included1.
Why is the British ISA being introduced?
The UK equity market has had a difficult run in recent years, and this has left many UK-listed businesses trading at a significant discount to similar companies that are listed elsewhere.
UK stocks trade at a significant discount to global peers
While this substantial discount persists, however, foreign companies and private equity are seeking to capitalise on the depressed prices they can find in the UK. Barely a week passes without news of another well-known UK company being acquired from overseas. Indeed, merger and acquisition activity may be a catalyst for better performance from UK stocks, but it may not be enough on its own. Hence, policymakers are looking to intervene, anxious about the implications for the health of the economy and stock market should UK businesses continue to be acquired.
Many in the industry have also called for proactive measures to encourage domestic investors to reallocate capital towards UK equities, in order to strengthen this important part of the country’s financial infrastructure.
Why is the British ISA important for UK Investors?
The overall aim of the British ISA is ultimately to encourage more demand for UK equities. Stock markets are balancing mechanisms through which the forces of supply and demand find an equilibrium through movements in price. The so-called “invisible hand” of the market moves prices higher when there are more buyers than sellers. A higher share price incrementally encourages more sellers and deters a few buyers until equilibrium is restored. The same thing happens in the opposite direction should sellers of a stock outnumber buyers.
All else being equal, encouraging more demand for UK equities therefore equates to the prospect of higher prices and valuations for British businesses. However, it remains to be seen as to whether the policy stimulates enough demand to make a meaningful difference. Critics suggest that, at £5,000 per person annually, the size of the additional British ISA allowance is too low to make a big difference, and the number of savers who are fortunate enough to be able to fully utilise their ISA allowance each year is too small.
If there is an impact, it is perhaps likely to be felt most significantly by smaller UK listed businesses, where a small amount of additional demand could make a meaningful difference to share prices. Two of BlackRock’s three UK-focused investment trusts are explicitly targeting these smaller companies.
Overall, perhaps the policy should be seen as a positive step in the right direction. The fact that policymakers are trying to address the undervaluation of UK equity is encouraging and, in time and with other measures, it could signal the start of a period of better long-term performance from the UK stock market.
In conclusion, the British ISA should be seen as a helpful addition to the savings regime. It means investors have the opportunity to shelter even more of their savings from the tax authorities. That makes it a quick win for savers, and potentially an even bigger win for the UK economy and stock market over time.
For further information on BlackRock’s investment trusts, please visit: blackrock.com/uk/its
