Introducing the UK ISA: don’t panic!

You’ve been crying out for a UK ISA, right? I mean, even the investing platforms said they didn’t want one but somebody must have asked for it.

Perhaps it was you?

Well, you and Chancellor Jeremy Hunt, who presumably wanted another bone to throw to the electorate.

And so the Dad’s Army ISA has marched on the parade ground.

Or rather it’s marched into a consultation phase.

The basic idea is clear enough. We’ll get an extra £5,000 annual ISA allowance to invest in UK-listed companies.

And – thankfully – the existing £20,000 annual ISA allowance remains unmolested.

But beyond that there are lots of questions. The consultation will run until 6 June 2024, and we won’t get specifics until well after that.

I wouldn’t expect the fine print to be written – and the platforms to be ready to implement the UK ISA – until the Autumn Statement at the earliest. Perhaps not even until April 2025.

You’ll just have to wait to fill your boots with M&S and Tesco shares while playing Land of Hope and Glory on the gramophone.

Fool Britannia

The UK ISA consultation is specifically not asking whether a UK-restricted ISA vehicle is a good idea, stating:

This consultation does not ask for views on the principle of introducing a UK ISA or alternative options for achieving the policy objectives.

No surprise there. The Dad’s Army ISA UK ISA is a political bauble, not a serious bit of legislation.

You and I may believe that UK equity markets are in a funk because the country has been in political tumult for the best part of a decade, Brexit damaged our terms of trade and is costing £100bn a year in GDP, the UK economy is stagnant, and foreign investors have stepped back from buying UK shares accordingly.

We also know it’s the resultant de-rating of UK shares – made even cheaper by a weaker pound – that’s driven the rash of UK takeovers by foreign companies.

But the Government – supposedly – believes that UK equities languish because the average Joe Bloggs has £5,000 lying around that they would just love to invest in British companies inside a tax wrapper, if only they hadn’t filled their existing £20,000 annual allowance with, I don’t know, a global tracker fund?

Never mind that only 15% of ISA savers use their full allowance anyway.

Non-party political broadcast

The idea that the UK ISA is designed to meet an investor need – or even the needs of the London stock market – is absurd.

It’s a political bung in a post-Brexit Britain where slapping the Union Jack onto things is about the only tangible ‘positive’ outcome from leaving the EU.

However such clear-eyed cynicism doesn’t mean we shouldn’t use it to improve our investing returns.

British bonds for a British ISA

Politics aside, my main concern with the UK ISA is it enshrines home bias and could distort behaviour for no good reason.

Particularly so when it comes to passive investing, which should be into global equities and domestic bond funds.

However on reading the consultation paper, the intention is currently to allow the new wrapper to hold gilts (UK government bonds) and UK corporate bonds.

If this makes it into the final UK ISA legislation, then passive investors should simply be able to put their UK ISA allowance towards their bond allocation.

That bond allocation would usually be UK bond funds anyway.

Like this, we’ll get an extra £5,000 a year of tax-free wrapper to build up the 40 in a 60/40 portfolio.

Of course doing so won’t help UK equities re-rate.

But as I’ve said that’s not happening on the back of the UK ISA, and it’s not really the point anyway.

None of your funny foreign shares

What about equities?

The devil will be in the detail and the consultation doc acknowledges there’s a lot of ways things could go. It looks back to the previous PEP era, which constrained investment to UK-listed companies, noting:

This approach would enable the UK ISA to support a range of UK companies, from small companies trading on AIM, to medium or large UK companies that are listed on the London Stock Exchange. It could also support UK companies across a range of sectors such as construction, healthcare and technology.

This approach also means that it would be easy for investors and ISA managers to identify eligible companies. However, it would not take into account the proportion of the listed group’s commercial activities conducted in the UK, as defined for example by source of revenue or location of assets.

The alternative approach – maintaining a list of ‘permitted’ companies – wouldn’t be hard to create. At least not with the resources of a government.

Such a list might be based on sources of revenue or where the workforce is located (UK or abroad) or where a company pays its taxes. Or any number of other things.

No, the difficulty would be keeping that list up-to-date on an ongoing basis.

Moreover, presumably the aim of the UK ISA is not to see an ambitious UK company that acquires an overseas rival suddenly made an ineligible holding.

How will that – and countless other similar issues – work out?

The same questions arise with funds and investment trusts, which are also intended to be allowed in a UK ISA.

If Apple shares fall and a mostly UK fund manager wants to buy them, will they be dissuaded from doing so because they stand to be booted out of the nation’s Dad’s Army ISAs? Will there be a grace period?

It’s all a finickety nonsense – but I suppose you know my view by now.

UK ISA operating instructions

Talking of which, I know what you’re thinking…

What about ISA transfers? Or investing in two UK ISAs in the same tax year? Can you turn your UK ISA into a cash ISA? Who will police all this?

To be fair the consultation paper raises all these questions and more. For now the answer is again we’ll have to wait until it’s finished before we know the rules.

To me this laundry list once more highlights that the UK ISA is a dumb complication everybody could do without.

It’s silly and it’s not investing related. End of.

And before the usual suspects accuse me of running Britain down – like I apparently do when I bemoan our leaving the EU for hurting the UK economy (go figure) – then au contraire, my jingoistic chums.

I too lament the state of the UK stock market – and the City generally.

I cut my teeth investing in UK-listed companies. Even today my (very actively managed) portfolio tends to hold an order of magnitude more UK stocks than a global tracker does.

However I’m very sure the UK ISA won’t meaningfully help with anything that truly ails the UK market.

Better for Blighty

What would, you ask?

Sadly we can’t undo the foolish decisions of the past. At least not for a while anyway.

But there were other helpful actions that Hunt could have taken.

The government shouldn’t have raised UK corporation tax, for starters, and preferably further cut it.

I would also have abolished stamp duty on LSE share dealing. It’s a pernicious cost of putting money into UK shares – and meaningfully so for the big international money that could actually drive a re-rating.

But as I’ve repeatedly said, the UK ISA has very little to do with the investing needs of us, nor even the wider environment for UK stocks.

It’s all about enabling Barry Blimp to put £5,000 into Rolls shares in a specially-designated UK ISA and then to boast about it at the golf club.

Indeed given it’s only really about politics and optics, I suspect the government will eventually allow any old UK-listed company to be held in a UK ISA.

At least that will save on compliance costs and paperwork.

How to use your UK ISA allowance

To be clear, those of us who can use this extra allowance should absolutely do so. On a personal level, we should take all the tax mitigation measures we can get.

For passive investors, at this stage this looks like holding some of your UK government bonds in your UK ISA.

For active investors, we can hopefully rejig where we hold our stock picks and fund purchases to meet the UK ISA requirements.

Of course I welcome the de facto rise in the annual ISA allowance to £25,000. It’s been frozen for years.

But it’s a shame it’s being lifted via this dopey vehicle.

It’s all good news for Monevator though. More complications means more confused people coming to our site asking “WTF?”

But I’ll leave it to other media outlets to hang out the bunting.

Want to comment on the UK ISA consultation paper? You’ll find it on the government website.