The OCF for both funds is reduced by 15 basis points, from 0.65% to 0.50%, effective from 1 November.

AJ Bell Investments’ multi-asset income range has delivered strong performance since launch in March 2019, with a five-year total return of 22.51% and 27.58% for the VT AJ Bell Income Fund and VT AJ Bell Income & Growth Fund respectively, as at 31 October 2024.

The funds will also now offer a smoothed income profile, with 11 equal monthly income payments and a final balance distribution in month 12.

Since launch, the multi-asset income range has formed an important part of the success of AJ Bell Investments, alongside its Managed Portfolio Service (MPS), Growth and Responsible investing funds. The Investments business has grown to assets under management (AUM) of £6.8 billion as at 30 September 2024, up 45% in the year and with inflows of £1.5 billion.

Today’s announcement follows charge reductions on its Investcentre adviser platform earlier this year, with fees cut to between 0.2% and 0.075% and capped on accounts over £2m.

Ryan Hughes, AJ Bell Investments managing director, said: “After another strong year for our Investments business, we are very happy to announce a reduction in charges for our range of income funds. We remain committed to passing on economies of scale to our customers as we continue to grow, ensuring we are delivering excellent value investment solutions alongside strong investment returns.

“At the same time, the move to a ‘smoothed income’ approach helps customers using our income funds manage their investment income. As more investors look to rely on investment income in retirement, this approach will make life easier, with a consistent, reliable income enabling better budgeting and cashflow planning.”

With the UK Chancellor promising that there will be no return to austerity, tax rises seem inevitable but who will bear the brunt?

RSM said in its Budget predictor today (15 October) that the government ruled out rises in income tax or National Insurance contributions (NICs) for working people in its election manifesto and capped the rates of VAT and corporation tax so could businesses end up shouldering much of the burden through increased employment taxes?

Will we see short-term tax raids, or will the Chancellor stick to longer term measures to signal the government’s commitment to certainty and stability?

Whilst VAT on private school fees has been pre-announced, there are also rumours of changes and potential rate hikes for capital gains tax (CGT) and inheritance tax (IHT). The challenge the Chancellor faces is that whilst CGT and IHT may be soft targets politically, neither are significant revenue raisers. Estimates show that, together, they contributed around 2.5% of the total tax collected by HMRC in 2023/24. It’s difficult to see how changes to them could raise the additional tax revenue seemingly required so other major measures are likely to be needed.

CGT set to increase

RSM said that with CGT rates historically low, an increase seems unavoidable, possibly with immediate effect on Budget Day. This could even take the form of aligning CGT rates with income tax, which would mean a top rate of 45% for those with the highest earnings. Alternatively, the Chancellor could take inspiration from the United States and introduce different CGT rates for short-term and long-term gains, targeting higher rates at those ‘flipping’ assets for profit.

HMRC’s estimates indicate that increasing CGT rates by 10% would likely reduce the overall tax take by £2bn per annum within just three years, as it would discourage taxpayers from selling chargeable assets. If the Chancellor does increase CGT rates, aligning these with income tax rates would therefore appear counter-productive. However, she could accompany rate increases with changes to reliefs to target the impact of the rises. Another option open to the Chancellor to influence behaviours would be changing the current temporary non-residence rules, which enable taxpayers to avoid CGT by leaving the country for five years, making temporary non-residence a less attractive tax planning option.

Scrapping business asset disposal relief

RSM also said the Chancellor could choose to reduce the benefits available to taxpayers from various CGT reliefs. Business asset disposal relief, originally intended to encourage entrepreneurial behaviour by reducing CGT from 20% to 10% on gains on business sales, has become less effective since the lifetime gain limit was reduced from £10m to £1m in 2020. Scrapping this relief could be a simplification, whilst delivering savings of around £1bn per annum.

Carried interest reform

RSM continued that the government has also signalled its intention to make changes to the taxation of carried interest; the return private equity and venture capital fund managers make on successful investments. Carried interest is currently subject to CGT rates with an 8% surcharge, giving an effective top rate of 28%. The Chancellor is considering changes following recent consultation, but may, in the short term, move the effective rate applied to carried interest closer to the highest income tax rates.

Tax hikes on gifts and inheritances

The Chancellor is also expected to target IHT, said RSM, but it is difficult to see how IHT revenues could be significantly increased without an overhaul of the regime and its interaction with CGT, as most IHT arises on death when reliefs may be available to offset the tax charge arising. Having ruled out the possibility of introducing a wealth tax, the Chancellor has left the door open to increasing IHT revenues by withdrawing business relief for AIM-listed portfolios and agricultural relief for owners not actively farming their own land, and/or capping reliefs for other claimants.

Pension reform – too complex to tackle?

Subjecting individuals’ pension funds to IHT on death is another possible change to the rules we might see on Budget Day, RSM predicts.  Pension reform could also take the form of limiting the rate of income tax relief on pension contributions, or a reduction in the tax-free lump sum which can be withdrawn during a pensioner’s lifetime. Pension taxation has been a popular topic for budget predictions for more than a decade; however, potential changes are fraught with complexity and political sensitivity, which is perhaps why successive chancellors’ have shied away.

A softer stance on non-doms?

Having previously confirmed the intention to proceed with the proposed abolition of the non-domicile (non-dom) tax regime, there is speculation that the Chancellor may not take as hard a line as originally anticipated. The forecast impact on public finances of a mass exodus of wealthy non-dom taxpayers may have persuaded her to soften the impact of these changes, RSM concluded.

AJ Bell experts have also taken a look at Chancellor Rachel Reeves’ options to plug the £22bn ‘black hole’ identified in public finances, while at the same time attempting to realise the government’s central objective to drive economic growth.

It said some of the options that might be considered by the government include:

• Pensions tax relief, tax-free cash and the case for a ‘Pensions Tax Lock’
• Pensions ‘death tax’
• National Insurance (NI) relief on employer contributions
• State pension ‘triple-lock’
• Capital gains tax (CGT)
• ISA simplification
• Dividend tax
• Inheritance tax (IHT)
• Tax relief on AIM shares
• Income tax
• Business rates
• National Living Wage

Pensions tax relief, tax-free cash and the case for a ‘Pensions Tax Lock’

Tom Selby, director of public policy at AJ Bell:

“Rachel Reeves’ first Budget has been preceded by feverish speculation over whether pensions could be in the firing line as the new government scrabbles to raise cash to plug a supposed £22 billion ‘black hole’ in the nation’s finances. However, having already drawn the ire of retirees by means-testing the Winter Fuel Payment, the chancellor will likely be cautious about hitting older people for the second time in the space of a year.

“Recent reports suggest Reeves has backed away from the idea of fundamentally reforming pensions tax relief by introducing a ‘flat rate’ of tax relief set somewhere between 20% and 30%. This idea always felt like a non-starter, primarily because implementing such a reform would effectively result in millions of ‘working people’ – exactly who the chancellor and prime minister have said they will protect – being hit with tax hikes. Having just settled pay disputes with NHS workers, it is hard to imagine the new government will be spoiling for another fight over public sector pensions.

“The other suggested target on 30 October is pensions tax-free cash, with some suggesting the maximum someone can take in their lifetime – currently set at £268,275 – should be lowered. Any move along these lines would be deeply unpopular and potentially hugely complicated too. What’s more, neither reforms to pension tax relief nor paring back tax-free cash entitlements would likely deliver the substantial in-year savings the Treasury is looking for.

“The level of uncertainty created ahead of the Budget has real-world consequences, with both contributions and the number of people taking their tax-free cash rising in recent months. It is clearly not desirable that some savers feel forced to take decisions based on rumour and speculation rather than their long-term retirement goals. Given one of the key promises made by the new government was to deliver economic stability to Brits, Reeves should use her Budget to nip this issue in the bud by pledging not to make major changes to either pension tax relief or tax-free cash. This ‘Pensions Tax Lock’ would send a clear signal to savers that the goalposts won’t be moved and should give people more confidence to take decisions based on their long-term interests.”

A new pensions ‘death tax’?

Tom Selby, director of public policy at AJ Bell:

“The tax treatment of pensions on death will be viewed by many as low hanging tax fruit ready to be picked. Under existing rules, it is possible to pass on your retirement pot completely tax-free to your nominated beneficiaries if you die before age 75. If you die after age 75, any inherited pension is taxed in the same way as income. Crucially, pensions usually don’t form part of people’s estate for inheritance tax (IHT) purposes.

“This is undoubtedly a generous set of rules and something which could easily be reviewed by the new government. However, as is often the case with pensions, applying any new tax on death – or bringing pensions into the IHT net – would come with substantial challenges.

“The biggest of those would be around how to treat people who have made decisions about their retirement pot based on the pensions death tax rules as they are today. There will, for example, be lots of people who chose to transfer defined benefit pensions into a defined contribution scheme in part because they wanted to prioritise passing money on tax efficiently to loved ones. If all of a sudden that money became subject to a new pensions death tax, those people would, understandably, feel like the rug has been pulled from under them. It is therefore possible a complicated protection regime would be needed to ensure people are not subject to unfair and arguably retrospective tax measures. This would inevitably reduce the money the Treasury could potentially raise from such a move.”

Ending National Insurance (NI) relief on employer contributions?

Tom Selby, director of public policy at AJ Bell:

“Clearly there are no easy choices for Reeves, but NI relief on employer pension contributions could be an appealing target for a chancellor with limited options available.

“This relief currently costs around £17 billion a year, according to the Institute for Fiscal Studies (IFS), and charging NI, even at a lower rate than the standard 13.8% employers pay, would raise significant sums without breaking any of Labour’s key election pledges. Politically, this would also be less risky as it wouldn’t hit voters directly in the pocket – although there is a danger employers will scale back remuneration, including pensions, to meet this extra cost. If the government goes down this road, it will face a difficult balancing act deciding the level of tax that raises sufficient revenue without undermining its central objective of boosting economic growth.”

State pension ‘triple-lock’

Tom Selby, director of public policy at AJ Bell:

“While next April’s increase in the state pension is pretty much bolted on, it would hardly be surprising to hear Rachel Reeves use the Budget statement to re-announce Labour’s commitment to the ‘triple-lock’. UK pensioners are on track to see a sizeable inflation-beating increase to their state pension next year of almost £500, to just under £12,000.

“The government’s commitment to the triple-lock pledge means it’s likely the earnings growth figure of 4% will be used to determine the rise in the state pension next year. And at a time when inflation has fallen back closer to the Bank of England’s targeted rate of 2%, this will give a welcome boost to pensioners’ income in real terms.

“Sticking with its triple-lock promise may help redeem the government in the eyes of UK pensioners. The government is coming under more intensive pressure to ‘U-turn’ on its controversial decision to axe the Winter Fuel Payment for all pensioners, except those who claim Pension Credit. And although the increase to the state pension should help meet next year’s bills, it doesn’t help those who will be living close to the edge of their means this winter.

“The triple-lock guarantee has worked well in the favour of pensioners over the recent past, boosting the state pension by 28% over the last four years. But with the state pension edging ever closer to the frozen personal allowance of £12,570, and the concept of universal payment coming under increasing scrutiny, the government will have to take the bull by the horns at some point to address who should get the state pension, at what age, and how much.”

Capital gains tax (CGT)

AJ Bell pensions and savings expert, Charlene Young:

“Having ruled out increases to some other taxes, capital gains tax (CGT) might appear like an obvious place for the government to make changes and generate more tax revenue. The most radical option is equalising CGT rates with income tax – which would represent a huge tax increase for investors. The Institute for Fiscal Studies has called for reforms to go further – and for an end to the exemption on death – arguing that the current system actually discourages productive investment. The CGT allowance has been slashed in the past two years as former chancellor Jeremy Hunt sought to balance the books, but that doesn’t rule out further tax increases.

“However, it may not be the cash cow that many think it is. The government’s own figures show that a big increase in CGT rates could backfire and actually lead to lost revenue for the government. For example, raising both the lower and higher CGT rates by 10 percentage points, to 20% and 30% for non-property gains, would result in a total loss of £2.05 billion for the Exchequer by 2027/28. That’s because while the rates are higher, investors would be expected to change their behaviour to mitigate paying the tax.

“CGT being wiped out on death also creates an incentive in some cases to hold onto assets so they are taxed as part of the estate under IHT, potentially paying less or no tax. But if the government scrapped this tax break, there would likely need to be some allowance made to account for inflation. Otherwise people who have owned investments for a very long time would be severely punished.

“One option is to raise the rate of CGT for higher rate taxpayers back to 28% from April 2025. This would be relatively simple to implement and puts it back to the higher rate introduced by George Osborne in 2010. It also narrows the gap between income and investment gains, but not to the extent of taxing them equally at rates of up to 45%. Waiting until April 2025 rather than implementing a hike on Budget day could also bring forward sales investors were already considering.

“It would also be a logical second step to the changes already in progress. Private equity fund managers receive a share of the funds’ profits as carried interest in a personal capacity. Carried interest is taxed under the CGT regime at 28%, rather than as salary income, but the government has already set the wheels in motion to treat and tax it as income, despite calls that it could dent the competitiveness of the UK private equity industry.

“An alternative would be to get rid of some of the CGT tax breaks for businesses, where business owners selling their company benefit from a lower rate of CGT. Raising this rate from 10% up to 20% to equalise it with standard CGT rates is estimated to generate £710 million for the government by 2027/28 – but it’s clearly not a move that will be popular with entrepreneurs.”

ISA simplification

Tom Selby, director of public policy at AJ Bell:

“At a time when government is facing significant fiscal constraints and little by way of ‘good news’, ISA simplification offers the opportunity to announce a consumer-focused reform that will benefit investors and the wider economy. As a first step, the government should combine Cash and Stocks and Shares ISAs, the two most popular versions of ISAs in the UK, reducing upfront choice complexity and creating a more flexible system in which consumers could move easily between cash savings and investments.

“HMRC data suggests there are around three million people in the UK with £20,000 or more invested in Cash ISAs and no money invested in Stocks and Shares ISAs. If just half of that money was invested for the long term, an additional £30 billion of investment would be unlocked.

“Given around half of ISA assets on AJ Bell’s platform are invested in UK companies or UK-focused funds, domestic firms should disproportionately benefit as a result, with the potential for additional retail investment to deepen liquidity and support higher valuations for UK businesses.

“Steps could also be taken to improve the attractiveness of the existing Lifetime ISA. Helping people onto the housing ladder is a clear priority for the new government and the chancellor should iron out the kinks in the design of the Lifetime ISA to make it as attractive as possible to would-be homebuyers.

“Most obviously, the 25% early withdrawal charge, which effectively acts as a 6.25% exit penalty, is deeply unfair and punishes those for whom a change of circumstances means they can’t pursue their homeownership aspirations. Reducing this to 20%, so it simply aims to return the upfront government bonus, would be a simple, low-cost reform that benefits younger people.

“Government should also consider increasing the minimum property purchase price, which currently stands at £450,000, to reflect house price inflation since the LISA was introduced seven years ago.”

Dividend tax

Dan Coatsworth, investment analyst at AJ Bell:

“The previous government has already cut dividend tax allowance to the bone, going from £5,000 to the current £500. The big question is whether Labour is prepared to go any deeper.

“HMRC is expected to collect almost £18 billion from dividend tax in the current tax year so it is already a meaningful source of revenue. While slashing the allowance, perhaps to £250, cannot be ruled out, the new government would be incredibly unpopular with investors if it reduced the dividend allowance any further.

“Another option would be to raise the rate of dividend taxation, although there’s only so much room for manoeuvre with tax rates on dividends already very close to matching income tax rates for higher and additional rate taxpayers.

“The government will likely tread carefully here. Labour wants to encourage investment into the UK stock market and create a more vibrant place for British businesses to access growth capital. Therefore, taking even more of investors’ returns as tax could mean shooting itself in the foot.”

Inheritance tax (IHT)

AJ Bell pensions and savings expert, Charlene Young:

“Often cited as the UK’s most hated tax, despite only being paid by a small proportion of the population, the chancellor could set her sights on raising money through IHT. At 40% it’s already one of the highest tax rates, so it’s unlikely we’d see a headline rate increase. What’s more likely if Ms Reeves did want to change this tax is cutting allowances or whittling away certain reliefs to increase the amount some estates pay.

“A couple leaving their main residence to their children could potentially shelter a £1 million estate from inheritance tax, thanks to both the nil-rate band and the residence-nil-rate band – but either of these could be cut. Another option is taking a red pen to the reliefs given to businesses or to gifting rules – although these aren’t overly generous anyway.”

Tax relief on AIM shares

Dan Coatsworth, investment analyst at AJ Bell:

“Abolishing tax relief on owning certain AIM-quoted shares could be high up the list of ‘easy wins’ for Rachel Reeves. The Institute for Fiscal Studies said in April that abolishing IHT relief on AIM stocks would raise £1.1 billion in the 2024-25 tax year, rising to £1.6 billion in 2029-30. There is an argument to say the system is outdated and hard to defend.

“Business property relief legislation came into force in 1976 for family firms passed down through generations so that inheritance tax bills wouldn’t put a privately-owned business into liquidation. It was subsequently expanded to include holdings in businesses quoted on London’s AIM stock market following concerns that such investments were harder to sell quickly than shares on London’s Main Market. While AIM stocks are typically smaller in size versus ones in the FTSE 350 index, it’s fair to say that liquidity has improved since the junior market launched in 1995.

“Scrapping the tax relief on AIM stocks could backfire. Principally, it goes against the government’s efforts to support UK business growth. Without the tax benefit, investors might rethink why they are holding certain AIM stocks, leading to a sell-off in small caps just at the point where investors are starting to show more interest in the UK market. That could pull down valuations and accelerate UK takeovers if more companies are trading cheaply.”

Income tax

AJ Bell pensions and savings expert, Charlene Young:

“While the chancellor pledged in the election campaign not to raise the rate of income tax, that doesn’t preclude extending the current freeze on thresholds, which is tantamount to raising tax by the back door. It was a tactic used by the Conservatives to raise taxes on working households, with rising wages at a time of high inflation providing a super-charged stealth tax on earnings. The effect is muted somewhat when wage rises are lower, which is to be expected as inflation comes down, but it’s still an easy way to boost tax revenues.”

Business rates

Danni Hewson, head of financial analysis at AJ Bell:

“Keeping high streets thriving and preventing further boarded up holes in the heart of our towns and cities will likely have at least made the chancellor’s to do list.

“The letter from a host of well-known retailers asking the chancellor to consider cutting business rates while the promised reform to the system goes through its laborious cycle has highlighted once again the inequality of a system created in the days before online shopping. But with so many calls on the public purse and similar demands from the hospitality sector to extend current relief beyond March next year, it’s a measure that’s unlikely to make Rachel Reeves’ final draft.

“Labour has promised to be a party which supports British business, but the wait for this first Reeves Budget has felt like death by a thousand cuts.

“Confidence has been eroded and markets have already fired a shot along the Treasury’s bow with lending costs easing up as investors digest speculation that the chancellor will re-write some of the fiscal rules. Even in politics, two years isn’t that long, and no one has forgotten the gilt sell-off that sent markets into a tailspin following Liz Truss’ disastrous mini-Budget.

“This Labour government has an almost impossible task to perform at the end of the month, to deliver enough to reinject confidence back into the country without increasing headline taxes or maxing out the emergency credit card.”

National Living Wage

Danni Hewson, head of financial analysis at AJ Bell:

“Last year’s whopping increase to the National Living Wage has already been cited by many companies as an oversized burden that’s eroded the bottom line. Card Factory, Greggs and Co-op have been amongst the businesses laying out the impact of increased wage costs to their investors.

“While the state pension is tied to the triple-lock and is almost certain to rise by 4% next March, benefits only look at the headline rate of inflation for September, which is expected to come in at 2.2% on Wednesday morning.

“The National Living wage works slightly differently as it will be up to the Low Pay Commission to make its recommendations for 2025, but inflation will be a key factor in that decision making process and after last year’s record increase many employers are hoping for a more manageable uplift this time around.

“However, with Labour’s pledge to create a ‘genuine living wage’ there are plenty of employers waiting nervously for the government’s recommendation which is expected to be outlined by Rachel Reeves in the Budget.

“As expectation mounts that employers may also have to shoulder National Insurance on pension contributions, there will be plenty of businesses reining in expansion plans or considering ways to better harness technology like AI to keep bills down.”

Over 16,000 reclaim forms were processed during the quarter, with an average reclaim of £3,540 – the third highest figure on record, while almost £1.3bn has now been reclaimed by people overtaxed on pension withdrawals since 2015.

Tom Selby, director of public policy at AJ Bell, said: “HMRC’s outdated approach to the taxation of flexible pension withdrawals continues to hit hard-working savers, with the latest official figures revealing almost £1.3 billion has now been repaid to savers who were overtaxed on their first withdrawal and filled out the relevant HMRC form to claim their money back. Worryingly, the average reclaim per person spiked to £3,540 during the latest quarter, the third highest three-month figure on record.

“The true overtaxation number will likely be substantially higher. In particular, people on lower incomes who are less familiar with the self-assessment system might be less likely to go through the official process of reclaiming the money they are owed. As a result, they will be reliant on HMRC putting their affairs in order.

“It is simply unacceptable that, almost a decade on from the introduction of the pension freedoms, the government has failed to adapt the tax system to cope with the fact Brits are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days.

He continued: “One way savers planning to take a single withdrawal in a tax year can potentially avoid the shock of a big overtaxation bill is by taking a notional withdrawal first. This should mean HMRC is able to apply the correct tax code to the second, larger withdrawal.

“Alternatively, you can fill out one of three HMRC forms and you should receive your tax back within 30 days. If you don’t do this, the Revenue says it will put you back in the correct tax position at the end of the tax year.”

Since 2015, HMRC has chosen to tax the first flexible withdrawal someone makes in a tax year on a ‘Month 1’ basis.

This means HMRC divides your usual tax allowances by 12 and applies them to the withdrawal, landing hard-working savers with shock tax bills often running into thousands of pounds.

While those who take a regular income or make multiple withdrawals during the tax year should be put right automatically by HMRC, anyone who makes a single withdrawal will likely be left out of pocket.

It is possible to get your money back within 30 days, but only if you fill out one of three HMRC forms to reclaim your money. If you don’t, you are left relying on the efficiency of HMRC to repay you at the end of the tax year.

Commented on the deal, which was announced yesterday, Laith Khalaf, head of investment analysis at AJ Bell, said: “This is a blockbuster merger of two of the biggest and oldest names in the investment trust world. The deal will result in lower annual charges for investors, as well as preserving the long dividend track records of both trusts.

“The share price of both trusts rose on the back of the news, especially Witan, which suggests the market thinks the deal provides decent value to both sets of shareholders”, he said. The new combined trust will be called Alliance Witan and shareholders can expect to receive detailed proposals in the post by the end of August, with a vote in September, and the transaction completed in September or October, the company said in a statement commenting on the deal.

£5bn merger

Khalaf predicts that the £5bn merger will now likely catapult Alliance Witan into the FTSE 100, where it will sit alongside global competitors F&C Investment Trust and Scottish Mortgage.

Inclusion in the FTSE 100 is likely to increase liquidity and visibility for Alliance Witan, though, he says, most passive funds tracking the UK stock market follow the FTSE All Share, and most active funds eschew investment trusts, so we shouldn’t expect this to be a “total gamechanger”.

“Scale is likely to be the greater driver of liquidity, with institutional investors and pension funds feeling more comfortable dabbling in a larger vehicle, because they can make a meaningful investment without owning too much of the trust,” he added.

Why the deal is happening

AJ Bell point that there has been a great deal of consolidation in the investment trust industry, driven by high discounts and falling asset values. “But that’s not what’s going on here,” Khalaf adds. “Both these trusts have significant assets and are big enough to keep ploughing their own furrows if they so wished.”

He pinpoints the announced retirement of Andrew Bell, fund manager of the Witan Trust,  to have been a critical catalyst for the merger. The search for a successor led the Witan board to the deal with Alliance Trust.

“This may have been to preserve the investment approach, seeing as single-strategy multi-manager funds like Alliance Trust and Witan are a rare breed nowadays, largely displaced by risk-rated multi-asset funds,” he says.

Investment strategy

“The new vehicle will follow the existing investment strategy of Alliance Trust rather than Witan, hardly surprising seeing as the lead manager of Witan is retiring. Willis Towers Watson have also done a good job at steadying the Alliance Trust ship and delivering outperformance since they were handed the mandate in 2017.

“Willis Towers Watson have successfully implemented the best ideas approach at Alliance Trust, and since taking over in 2017 have outperformed the MSCI World Index by 8.5 percentage points on an NAV basis (to the 31 March 2024). That’s a rather pleasing result which has been matched by few active managers, against a backdrop of big tech stocks dominating market returns. 

Alliance Trust says there will be no change to the investment strategy, though it will be interesting to see if the implementation of that strategy shifts, in particular whether the roster of managers expands beyond the current stable of ten stockpickers, to “spread the risk and liquidity of a larger pool of assets”, AJ Bell adds.

Instead, key industry figures are calling on institutional investors to help “shoulder the burden” of boosting the performance of lacklustre UK equities, and believe the simplest solution to encouraging more retail money into the home market is to abolish stamp duty and increase the tax-free threshold of the original ISA.

Days before Chancellor Jeremy Hunt’s Autumn Statement in November last year, it was widely expected he would announce the launch of a British ISA, which would allow investors to increase their £20,000 tax-free limit by £5,000 in order to invest in UK stocks, in a bid to bolster the ailing home market.

See also: Pridham Report: ‘Bruising’ 2023 sees record outflows for UK fund industry

This was notably omitted from the statement, however, with Chancellor Hunt instead pledging to “simplify the [ISA] scheme” and “widen the scope of investments that can be included in ISAs”. Confirmed changes from the 6 April this year include permitting multiple subscriptions to ISAs of the same type each year; and enabling savers to hold LTAFs and open-ended property funds with extended notice periods within Innovative Finance ISAs. ISA, Lifetime ISA and Junior ISA annual subscription limits remained unchanged at £20,000, £9,000 and £4,000 respectively.

The reason British ISAs were left out of the Autumn statement became apparent at the end of last month, however. According to a report from The Telegraph, Prime Minister Rishi Sunak has pushing back against HM Treasury over the scheme, which allegedly would have been rolled out from the start of the 2025/26 tax year – beyond the date of the upcoming general election. Concerns cited by the No.10 officials, according to the report, include dictating where investors should put their money, and a lack of appetite for the launch of a new ISA product.

Now, ahead of the Spring Budget on 6 March, platform providers and senior investment professionals are calling for the British ISA to stay firmly off the cards, with many warning they could have negative implications for investors.

Tom Selby, director of public policy at AJ Bell, calls the concept of a British ISA – sometimes referred to as a GB ISA or BRISA – “a bad idea”, although says it is not exactly clear yet what the scheme would propose.

“Some have suggested this could mean an extra ISA allowance to invest in UK companies and funds, which would increase complexity,” he explains. “Others have argued ISAs should only be allowed to invest in UK companies and funds, significantly reducing the ability for investors to diversify globally. Both would be retrograde steps and should be resisted by the government.”

Susannah Streeter, head of money and markets at Hargreaves Lansdown, says: “It’s not surprising there appears to be scepticism about the plan right at the heart of government. The economy is clearly in need of an injection of investment to help drag economic growth out of a stupor, but mooted plans for a British ISA to help direct investors’ money into UK-listed companies adds unnecessary complexity, could fail to achieve its aims, and could have a negative impact on UK investors.”

Concentration risk

One of the key criticisms of a proposed British ISA is the concentration risk it could expose investors to – made worse by the fact the UK stock market has been so volatile over recent years. According to data from FE Fundinfo, the MSCI United Kingdom index has a maximum drawdown – which measures the most money an investor could have lost had they bought and sold at the worst possible times – of 31.6% over the last five years. Its MSCI World counterpart has a maximum drawdown of 24.6% over the same time frame.

Rob Morgan, chief analyst at Charles Stanley Direct, says: “This is the big issue for me; there has been precious little said in this debate about what is right for the individual.

“A British ISA, if directed at single stocks, corrals private investors into taking on more stock-specific risk and concentrating their portfolios. Most investors are not in a position to navigate the complexities and risks of buying individual shares and are better served by using collective funds and spreading their investment.

“In addition, many investors already have significant exposure to the UK and further investment in this area is neither necessary nor desirable from the perspective of proper diversification.”

Andrew Prosser, head of investments at InvestEngine, agrees, adding that for an ISA to work best, investors should hold a globally diversified portfolio.

“If an equity investor managed to fill their regular ISA by investing in a global portfolio, and then also filled up their British ISA, the resulting portfolio would have an allocation of over 20% to UK equities. This is a significant deviation from the UK’s weight in the global equity market, which currently stands at just over 3%,” he explains.

“Investors may also be tempted to fill their British ISA before contributing to their regular ISA, which would result in even more concentrated portfolios. This ISA is encouraging savers to take large active positions within their portfolio for protectionist reasons. Home bias is already an issue for British investors, and this would exacerbate the issue.”

Indeed, Streeter concurs that UK investors are already firm backers of the London Stock Exchange, with 1 million of Hargreaves Lansdown’s 1.8 million clients currently invested in UK equities. This accounted for 80% of the platform’s trades in the last year, with 70% of investors holding at least part of their position in a company for more than 12 months.

Sheridan Admans, head of fund selection at Tillit, says: “While the BRISA poses an interesting possibility for encouraging investment in UK companies by UK savers, without more detail it seems like a great deal of expectation is being put on the shoulders of retail investors to come to the rescue at a time they are being squeezed by more immediate demands.”

Will it work?

Admans adds that, according to HM Revenue & Customs data from June 2023, stocks and shares (ex-cash) ISA subscriptions for 2021-2022 totalled approximately £34.2bn.

Given the UK listed market’s mid-2023 market cap of approximately £3.6trn, he says “the BRISA alone may not be the immediate solution to this pressing issue”.

And Jason Hollands, managing director of corporate affairs at Evelyn Partners, warns that UK savers could simply use such an allowance to invest less in UK equities in their core ISA allowance “to compensate for the restrictive nature of a British ISA”.

“A new British ISA would also likely only be utilised by those already maximising their core £20,000 ISA allowance,” he says.

“This is relatively modest number of people in the scheme of things, which also includes those using the £20,000 allowance solely for cash savings, not investments.”

Streeter agrees with Hollands that investors could find a way around compensating for the UK allocation requirements, adding: “Those who already max out their £20,000 ISA allowance could simply hive off all their existing UK holdings to the British ISA, and use the extra wiggle room to invest more overseas in their usual ISA.”

And even then, research from InvestEngine’s Prosser found that fewer than 15% of investors reach the maximum £20,000 capacity in their ISAs, in any case.

The other issue with relying on UK savers to bolster the health of the UK stock market is the FTSE 100’s global nature, with approximately 75% of its revenue being generating from overseas.

Paul Derrien, investment director at Canaccord Genuity Wealth Management, says this is a “big issue”, pointing out there is “significant amounts of overseas earnings in the FTSE 250 too”.

“So, who is this policy benefiting? Maybe there needs to be a restriction on how UK-centric the business actually is, though how this would be applied in practice sounds too onerous.”

AJ Bell’s Selby also says ISA investments into UK-based companies “will not necessarily result in a substantial boost” to UK firms, given FTSE 100 companies are “generally international businesses”.

Creating complexity

There will be creases to iron out when it comes to the design and implementation of the British ISA – if it ever comes to fruition. Details on the product so far are scant, although several commentators fail to see a fool-proof way for the product to improve UK stock market performance while simultaneously benefiting investors.

“What constitutes a UK investment? UK-listed shares or a subset? Would investment trusts or other collective vehicles be included?” Charles Stanley’s Morgan asks. “Would this be a separate extra allowance or part of an expanded ISA wrapper? The former would create yet another product and the latter would represent a challenge for monitoring and reporting.

“Any segregated allocation would rise and fall at a different rate to the rest of the investments in an account, and selling and buying activity would further complicate matters.”

Not only could providers come up against challenges, for the investor themselves, there is the additional argument that another ISA will only increase complexity – contrary to Chancellor Hunt’s pledge to simplify the initiative. To date there are five different types of Individual Savings Accounts: Cash ISAs, Stocks and Shares ISAs, Lifetime ISAs, Junior ISAs and Innovative Finance ISAs.

“The British ISA complicates the already convoluted world of tax wrappers when really the government should simplify the regime,” says InvestEngine’s Prosser.

“Instead of progressing with a British ISA, the government should streamline the ISA wrapper by only having one type of ISA to cover savings and shares, with a single annual limit and education cues about what investors can use their ISA for.”

Morgan agrees that a British ISA “is at odds with calls for ISA simplification”.

“Over the years a once-simple ISA regime has morphed into a many-headed beast with such variations as Help to Buy, Innovative Finance and Lifetime ISA popping up, potentially exacerbating lack of consumer understanding.”

James Yardley, senior research analyst at Chelsea Financial Services, says: “It sounds rather complicated and highlights a potential risk of this strategy by the government.

“The great success of ISAs has come through their simplicity. They’re easy to understand and implement, but as soon as you add in complexity people will switch off. In theory this may be a good strategy, but we will need to see more details first.”

The benefits

Not every aspect of the British ISA has been met with criticism. Yardley reasons that it could have “a much-needed positive impact on investor sentiment” towards the UK stock market.

“It will encourage people to invest in the UK,” he says. “A lot of people who should be investing don’t, which is a crying shame because it causes them to have much worse financial outcomes throughout their lives. ISAs are a great vehicle for people looking to start their investment journeys with freedom from capital gains and income tax.

“We need a stronger UK stock market that allows British companies to access capital markets and grow more efficiently. What has happened to the UK market has been a self-inflicted calamity.”

According to data from Statista, the number of companies trading on the London Stock exchange between January 2015 and July 2023 has fallen from 2,429 to 1,900 – a 21.8% decline. Meanwhile, a survey from the Quoted Companies Alliance published at the end of last year found one in four listed UK small- and mid-cap businesses saw no benefit in being publicly quoted.

Canaccord’s Derrien also believes the British ISA could encourage investment back into UK firms, which could therefore “potentially stem the tide of companies not being listed in the UK”.

Mike Coop, chief investment officer at Morningstar Investment Management EMEA, says UK equities offer “a long history of innovation and commercial enterprise, as well as safeguards for investors”, despite negative sentiment. He therefore says a tax-effective way to gain access to British companies “would be welcome”.

“The research we use when we’re building portfolios for advised investors indicates better value on offer for UK listed companies at current prices than many other markets, so there is a return potential and, for those seeking income, the UK does offer currently a higher level of yield than many other markets,” he points out.

Dan Moczulksi, UK managing director at eToro, argues that if the British ISA is built in the correct way, retail investors “should not have to take any additional risk”.

“They should still be able to invest their core ISA allowance in whatever way they see fit and then have the choice of using an additive allowance for UK-listed companies,” he says.

“Any new vehicle which incentivises more investment in UK-listed companies obviously stands to benefit these companies. It’s a virtuous cycle. More investment in these firms means more capital for them to deploy, helping them to grow. It also means share prices move higher, attracting further investment for retail investors seeking good returns.

“This in turn makes the UK a more attractive place to list as a business, as firms feel confident that their share price will improve and they will attract a lot of investment. Big, well-known companies listing in the UK would then attract more attention from retail investors, and the cycle goes on.”

Remember PEPs?

While there is widespread agreement that something must be done to improve sentiment towards buying into UK stocks, some commentators says the scheme is reminiscent of Personal Equity Plans (PEPs).

Launched by the UK Government in 1992, the initiative was designed to encourage investment from UK savers into the home market via various tax incentives. However, the scheme was scrapped in 1999 and replaced with the ISA.

Charles Stanley’s Morgan says: “Rewinding back into the midst of time, this was the logic behind merging the Single Company PEP allowance with the General PEP to ultimately create the ISA in the first place.

“Investors were experiencing a wide range of outcomes with Single Company PEP, and it was decided that freedom of choice to encompass collective vehicles was preferable.”

Canaccord’s Derrien adds that, over time, the restrictions on buying UK businesses were removed as the product transitioned into the ISAs we have today.

Fixing the conundrum of the UK stock market

If the UK stock market is in dire need of revival, but a British ISA is not the tool to do so, is there anything else the government can do to breathe life back into our listed companies?

“Yes. A lot,” says Chelsea Financial Services’ Yardley. “They can eliminate stamp duty; reform the horrendous cost disclosure rules that disadvantage the investment trust sector; and empower a new generation of investors by enhancing financial education and encouraging people to move their Junior ISA investments out of cash and into the stock market.

“They can also incentivise pension funds to invest in UK stocks – perhaps starting with the pension funds of MPs.”

Other investors agree that targeting retail investors is not the right course of action, with Morgan concurring that while UK investors have a decent exposure to their home market, “pension funds have little”.

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Tillit’s Admans says: “Perhaps it’s time for the government to play a more proactive role in encouraging institutional participation in the UK stock market, directing more attention towards stimulating overall economic growth, and considering measures to ease interest rates and alleviate the pressure on living costs.

“Although the UK market presents itself as cheap, there’s a need for a more immediate and strategic catalyst to attract both local and international institutional investors to bump up valuations, rather than placing this burden solely on UK savers, especially amid a cost of living crisis and at a point in time where consumers are faced with higher mortgage rates. The cost of living alone saw £6bn less contributed to cash ISAs in the last financial year compared to the prior year.”

On the education front, InvestEngine’s Prosser says: “We would like to see more provisions for better financial education. Boosting it from an earlier age would enable more people to understand the benefits of long-term investing and move us away from being a nation where saving in cash is the default option.

“As part of this, consideration could be given to renaming ISAs to ‘Tax Free Accounts’ to make clear the main benefits of using them in order to increase engagement.”

Morgan says it is “no wonder” that private investors feel “increasingly put upon”, given recent significant cuts to capital gains and dividend allowances.

“Perhaps a more generous CGT rate or allowance for new holdings in UK stocks could be implemented, if held for a certain period,” he reasons. “The focus on capital gains would also naturally attract capital to more growth-orientated and smaller companies than on dividend-paying mature companies, but by simultaneously increasing the dividend allowance there could be a broader effect if desired.”

Evelyn Partners’’ Hollands says a British ISA would have to be accompanied by a wider package of reforms if it is to “move the dial” on UK stocks, which should include removing stamp duty on UK share purchases or “giving favourable tax treatment to UK shares in respect of inheritance tax or capital gains tax”.

eToro’s Moczulksi agrees that abolishing stamp duty when investing in UK-listed companies through the BRISA would “undoubtedly be an effective incentive”.

“Government contributions could also be the answer, adopting the same approach as a LISA, with the government contributing an additional 25% a year up to £1,000.”

Overall, however, the message from commentators seems to be clear: an increase in the original ISA’s tax-free threshold could solve a multitude of the UK stock market’s ailments. The allowance was last lifted almost seven years ago – to £20,000 in April 2017, from £15,000 just three years previously, and from £11,880 before that.

AJ Bell’s Selby says: “Given most investors have a natural bias towards UK companies and funds anyway, the most straightforward answer would be to simply to increase the ISA allowance.”

Hargreaves Lansdown’s Streeter adds: “Simply lifting the ISA allowance, without creating a new product, would result in a boost to investment in UK equities anyway. It would also still offer the potential for diversification, helping bolster retail investors’ resilience.

“Not putting all your eggs in one basket is one of the golden rules of investing, and it’s crucial that government policy continues to support that.’’

HM Treasury’s press office has been contacted for comment.

This article was written for our sister title Portfolio Adviser