It was a good week to announce a British Isa, one could argue. Another two mid-sized UK companies, the haulier Wincanton and the telecoms equipment group Spirent Communications, are falling to foreign buyers, causing fresh agonising over how the unloved UK stock market has become a bargain bin for overseas predators. A British Isa, goes the theory, will incentivise UK investors to prefer UK companies over the excitements of US tech stocks or S&P 500 tracker funds.
Here’s the problem. The chancellor’s design for a British Isa could hardly be more modest. He has created a £5,000 allowance, with the same Isa tax advantages, to be invested in purely UK assets (precise definition to follow after a consultation). That’s on top of the existing £20,000 maximum, where investors are free to roam the globe. Crunch the numbers on the likely takeup of the extra £5,000, however, and the sums amount to “a rounding error,” as investment platform AJ Bell put it.
Only about 800,000 people are now wealthy enough to use their £20,000 allowance in full in any year. On the generous assumption that all of those people have another £5,000 to invest, the extra cashflows into UK assets would equate to £4bn a year. That is equivalent to only 0.2% of the current £2tn-plus value of the UK stock market.
Even £4bn, however, will be an overestimate in practice because about a third of investments in stocks and shares Isas already go into UK assets. So, for £20,000-a-year Isa savers who allocate £5,000 to the UK without a prod, no fresh incentive to prefer UK assets has been created. They can carry on as before, just with a bigger tax perk.
The radical alternative, pitched by some lobbyists, would have been to turn stocks and shares Isas into entirely UK-only affairs. That would have shifted serious money since overall Isa equity investment is worth about £35bn a year. That idea, presumably, was a non-starter for two reasons: first, it would look too much like the UK government telling people how to invest their money; and second, there would be uproar because the UK stock market has been an international laggard in performance terms.
Thus the most intriguing halfway-house design for a British Isa came from the thinktank New Financial: increase the allowance to £25,000 and make 50% of it UK-only. The predecessors to Isas, personal equity plans, had a 50% UK threshold when Nigel Lawson introduced them in his 1986 budget, so Jeremy Hunt could have claimed a philosophical linkage with the Thatcherite vision of “a shareholding democracy”. He could also have argued that tax breaks for the wealthiest UK savers should have a more direct benefit for the UK economy. New Financial reckoned an extra £10bn a year could be channelled into UK equities.
Instead, the chancellor opted for the formula that will have the least impact and, argue some investment platforms, will create the most administrative hassle. Since FTSE 100 companies, the most likely target for any extra investment, are in any case very international – about 75% of their collective earnings come from overseas – the flag-waving exercise looks like a gimmick. Ditching the 0.5% stamp duty on UK share purchases would have been a more obvious way to make a splash.
