The introduction of a new British ISA was announced in the Budget, in a bid to revive the UK’s flagging stock market. The BRISA, as it has already been dubbed, will only allow money to be invested in UK stocks and bonds. The Government hopes to boost the performance of UK shares by restricting investment in this way and stop companies sloping off to the US stock exchange. It’s a laudable aim, but almost certainly misguided.

WHAT’S THE GOOD NEWS

First, the good news. The British ISA means investors will have an extra £5,000 ISA allowance to invest in UK stocks, on top of the £20,000 they can invest elsewhere. A bigger ISA allowance is definitely welcome, as the maximum allowance has been frozen since 2017. But it would have been much better if the government had simply raised the standard Stocks & Shares ISA allowance rather than introducing a brand-new account. The British ISA will be the sixth type of ISA available on the market, so it’s an added layer of complexity investors don’t need.

It also sets a worrying precedent of the state dictating where investors can put their money if they want to protect it from tax. They are trying to do this with workplace pension schemes too. What happens when a government wants to encourage more investment in private equity, renewable energy, or defence companies? Do we get new ISAs for those too? That’s a lot of ISA clutter.

More concerning is the prospect that instead of increasing the ISA allowance, which costs the Exchequer money, they start encroaching on the existing ISA allowance with restrictions on where it could be invested. This was mooted in the run-up to the Budget.

INVESTORS SHOULD HAVE FLEXIBILITY TO INVEST AS THEY CHOOSE

The bottom line is investors should be able to invest where they want, based on their risk profile and where they see the best opportunities. Attaching investment restrictions to ISAs encourages people to let the tax tail wag the investment dog. In other words, choosing investments based on saving tax rather than because of conviction in the market. The BRISA adds complexity to running a portfolio because it’s another limiting factor to consider. Fast forward five years and an investor might want to dial down their UK exposure, but the BRISA restrictions could leave them the choice of moving investments out of the tax shelter to invest them as they see fit or abandoning their investment plans in the interests of tax efficiency. No-one wants the headache of deciding whether a global fund held outside an ISA will return more after tax than a UK fund held within the tax shelter.

YOU CAN ALREADY INVEST IN THE UK WITHIN AN ISA

In practice, it’s of course already possible to invest in UK stocks within the existing Stocks & Shares ISA framework. Indeed, many people already do. Looking at AJ Bell’s ISA customers, half the ISA money they invest goes into UK assets. While performance of the UK stock market hasn’t been great recently, it’s still an attractive source of dividends. Smaller and medium-sized companies have also shone brightly over the long term. And while the UK is currently unloved, its low valuation provides some protection from falls, and some upside should sentiment shift in a more positive direction. There are good reasons to invest in the UK, it’s just past performance isn’t one of them. But as we know, that’s not a reliable guide to the future.

The high weighting ISA investors already have in UK assets suggests the BRISA won’t be successful in creating a seismic shift towards UK shares. ISA savers would have invested in them anyway. The BRISA will also likely only come into play for investors who have maxed out their £20,000 standard Stocks and Shares ISA allowance. There’s about a million of them at the last count. On the heroic assumptions all of them invest £5,000 into a BRISA, and don’t simply replace money they would have invested in the UK anyway, that’s an extra £5 billion or so going into UK stocks each year. Sounds like a lot, but the value of the FTSE All Share is currently £2.3 trillion. The BRISA won’t touch the sides.

WHEN WILL IT BE INTRODUCED

In terms of timing, the BRISA isn’t going to be introduced this April. There’s a consultation on how to implement it, as there are plenty of design challenges to overcome. The consultation closes in June and given the proximity of a general election and the fact the Labour party is committed to ISA simplification; the BRISA may never hit the shelves. The best-case scenario? The £5,000 extra is just added to the standard ISA allowance.

One thing which definitely is happening in April is tax bands will be frozen once again, and the dividend allowance and capital gains tax allowance will be cut back, to £500 and £3,000 respectively. There’s still a generous ISA allowance out there which protects your investments from tax, and you can put as much as you like in UK stocks, 5 April is the deadline for contributions in this tax year.

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