It makes total sense for the chancellor to answer calls for a UK Isa with a plan for a new additional allowance of £5,000 purely for British shares. It won’t win votes, but it will assist in delivering badly needed support to capital-starved companies, and at no upfront cost. In fact, supporting home-grown companies should generate increased tax revenues.
By rewarding investors in the domestic market with an extension to the main Isa tax shelter, the aim is to help stem the outflow of investment money from the UK market and to tempt others with low or zero exposure to reconsider.
A stronger stock market where companies are fairly valued will make it easier for companies to raise investment capital for their future growth and encourage others to list and stay listed. That, in turn, will benefit the economy and jobs. That is in everyone’s interests. It will help avoid the iniquity of companies being snapped up on the cheap. Critics will point to the possibility that investors just rejig their current allocations to take advantage of the new wrapper. But it is not just about existing investors. Premier Miton has previously pointed out that if Isa cash savers could be persuaded to invest £5,000 of their current allowance into UK companies it would deliver around £200bn of new capital into the market over a five-year period.
Brokers, fund managers and investors have been watching in despair as capital flows into the stock market in recent years have all but dried up, driving down valuations and leaving British companies at the mercy of bargain hunters. In the past few months alone, well over 50 companies have delisted, been acquired or received a takeover bid, Spirent Communications and Wincanton being two of the most recent additions to that list.
If our plcs are not being picked off, they are being tempted to list in the US where valuations are healthier thanks to deeper pools of capital. Investors’ heads have been turned too by the strong performance of the Magnificent Seven, which is arguably the main reason some investment platforms have been so unsupportive of a British Isa – the UK is not where most of the money is flowing.
Indeed the whole idea of a UK Isa has got quite a few people’s backs up. Many commentators have been expressing horror at the idea that investors would be “forced” into domestic companies, thereby breaking all sensible investment rules and destroying their future financial security. But they have stayed remarkably quiet about how much investors are stuffing into US tech stocks. The truth is that what most people feared was the removal of the tax shelter from outperforming US growth shares. That would have been infuriating, but there is the separate question of why more UK tax breaks are not focused on domestic shares. In France, the US, Japan and Italy, investors are handed generous reliefs for investing in the economy around them, not in other countries’ markets, and very few argue against it. In Italy, for example, you can invest in investment plans that are tax-free as long as you hold for five years with at least 70 per cent in Italian companies. There hasn’t been a peep either about the similar incentive to invest in Aim shares to secure IHT relief. That tax break is somehow accepted as a fair reward.
The new Isa won’t, of course, magic away all of the market’s problems, and £5,000 is a small sum indeed. There is only so much tilting things back to normal retail investors can achieve. The absence of pension funds in the market is a much bigger issue, but one that the chancellor has been working away at too through the Mansion House reforms and a new proposal for pension funds to disclose their weighting to UK assets.
Remember, what drove these giant funds out of UK equities was the appeal of bonds, and regulation, not terrible returns from UK equities. The disclosure plan does not require pension funds to invest a fixed amount in the UK market, however – it is simply to demonstrate how UK retirement schemes compare to their international peers (who invest far more in their home markets and even in the UK than ours do) and perhaps weaken their argument that investing a bit more into UK stocks is a bad idea.
Even if the UK Isa does not even drive much in the way of new inflows, it is the right thing to do and is a useful additional shelter for investors who use up all of their main allowance. It makes up for the Tories’ steep cuts to the capital gains tax and dividend allowances. I, for one, would hope that in future years the UK allowance will be increased.
Given the weight of negative responses to a UK Isa, there is a risk it will be killed at birth. For all our sakes, we should hope that it gets off the ground.
