In early reaction, Tom Selby, director of public policy at AJ Bell, said: “Lifetime ISAs are an extremely attractive way for people to invest for the future in specific circumstances. For first time buyers in particular a Lifetime ISA is a brilliant way to build up a deposit for a first home and benefit from a sizeable government bonus, as well as enjoying the ability to invest tax free like a conventional ISA.

“Lifetime ISAs can also offer additional flexibility to those saving for retirement, providing another option alongside a pension. For self-employed savers who do not benefit from automatic enrolment, the Lifetime ISA can offer an attractive alternative to traditional pension products.

“However, Lifetime ISAs aren’t perfect and this review from the Treasury Committee is a good opportunity to address some of the issues with their design, as well as exploring where the Lifetime ISA fits in a simplified ISA landscape. AJ Bell has long campaigned for an end to the punitive early withdrawal penalty, instead reverting to the system used during the pandemic when the penalty only matched the original bonus received on the account.

“Likewise, raising the property purchase price limit, which has remained fixed since the Lifetime ISA was introduced, would be an obvious quick win. Analysis from AJ Bell shows that in numerous areas average flats and terraced houses – the sorts of properties that might well appeal to aspiring homeowners – now exceed the £450,000 cap.”

ISA reform

He continued: “Crucially, the Treasury Committee’s findings should be a useful building block that informs the government’s plan to simplify the ISA system.

“Labour’s plan for financial services published in January 2024 pledged to simplify the ISA landscape, making it easier for people to save and invest and boost uptake of Stocks and Shares ISAs.

“Merging Cash and Stocks and Shares ISAs is the obvious starting point, a reform that would make life easier for investors and would-be investors and could provide a significant boost to UK capital markets at the same time. Over the longer term, the government should consider whether the best features of the current ISA regime can be combined into a single ISA product. Precisely where the Lifetime ISA fits within that landscape is up for discussion.

“But the long-term focus must be in simplifying the ISA system, reducing undue complexity and making it easier for people to identify the right product for them, without funnelling people into what feels to many like an either/or choice between cash savings and investments.

“The benefits of simplification for consumers and the UK economy could be substantial. In particular, merging Cash ISAs and Stocks and Shares ISAs – the two most popular ISA products in the UK – would make it easier for those holding money in Cash ISAs to transition towards long-term investing.”

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”.

See also: The Lang Cat: Advised platforms suffer record outflows in 2023

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

Outflows between Q3 and Q4 last year increased by 6.9% at £13.9bn. Q4 outflows alone increased by 51.1% compared to the same quarter last year, when outflows reached £9.9bn.

In contrast, advised gross sales ticked up by 1.9% between Q3 and Q4 last year to £15.8bn, while they increased by 16.5% compared to Q4 last year’s sales of £13.8bn.

Gross sales for the year stood at £63.4bn, a 2.5% fall compared to last year’s gross sales of £65bn.

On a net basis, however, Q4 sales reached a record low for the third consecutive year at £1.2bn – this marks a 70.1% fall compared to net sales in Q4 2022, and a 35.8% fall from Q3 2023. Net sales for the year reached £10.2bn, marking a 60.7% fall compared to 2022’s net flows of £26bn.

In terms of asset growth, total advised assets in Q4 last year were up 9% compared to the same quarter during the previous year, while assets increased by 5.3% between Q3 and Q4 2023 to £546bn.

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Rich Mayor, senior analyst at The Lang Cat, said the last quarter of 2023 “rounds off the dominant theme of rising outflows hammering net sales” in the advised platform market.

“Gross sales have been steady throughout, but the wider economic conditions mean more money has been taken out of platforms in 2023 than in any other year, with ISAs and pensions bearing the brunt of it,” he explained.

“The results show that the cost-of-living crisis meant financial plans had to be adjusted for a good portion of clients. The main reasons cited were investors supporting themselves and family members with the increase in household expenses, followed by concerns over capital preservation in volatile markets.

“On the latter point, we’ve also noted a shift in advisers’ retirement income strategies, with an increase in the use of annuities for more risk-averse clients.”

Full findings of The Lang Cat’s report, State of the Advice Nation, is due for publication later this week.

This article was written for our sister title Portfolio Adviser

This has therefore created a new dynamic in the decision-making process between using a multi-asset fund and a model portfolio service (MPS). While, within multi-asset mandates, trading occurs entirely within the fund, with no direct trading from the investor, model portfolio services are tracked as the individual investor making changes to their investments each time the holdings shift.

While these funds would be exempt from capital gains tax if they are within a pension or ISA, if they are instead held in a general investment account, the trading occurring within an MPS would be subject to capital gains tax if it exceeds the new limits of £6,000 and soon-to-be £3,000. Meanwhile, trading within a multi-asset fund would be unaffected for the end investor.

Gillian Hepburn, commercial director at Benchmark Capital, said: “If you’re holding the MPS, just within a general investment account, then that is subject to capital gains tax every time the model rebalanced, or if you sell out of the model, for example.

“So, you could argue that when you’re giving financial advice, you need to think very carefully about whether the client is likely to be subject to capital gains tax.”

See also: IHT take hits £5.7bn as government mulls changes in the Budget

In calculations by Hepburn, the maximum this would add to a higher-rate tax payer would be £1,260 for the 23/24 year, and £1,860 for the 24/25 year.

“What we’ve seen is, many advisers will always fill up the pension bucket, and then the ISA, and then the general investment account,” Hepburn said.

“The challenge is that, with capital gains tax allowances reducing, there will be more people who are likely to have to pay capital gains tax if they’re holding a model portfolio within a general investment account. This is one of the reasons that we think that more clients are moving towards using multi-asset funds.”

Simon Evan-Cook, founder and fund manager of the VT Downing Fox Funds, said when he was setting up his new product and deciding whether to launch an MPS or a fund of funds, the implications of capital gains tax was a key deciding factor.

“Having recently set up from scratch, I had the choice of going down the MPS route or launching a fund of funds range instead. I chose the latter because I genuinely believe they are by far the better option for advisers and their clients,” Evan-Cook said.

“CGT is one of the big reasons for this. Within our funds of funds, when I sell a holding I can do so safe in the knowledge that it will have no CGT implications for any of its holders, regardless of whether they hold it in a tax wrapper or not.

“This is not the case when running a non-unitised portfolio like an MPS or most DFM offerings, where selling a large holding that has gained a lot over the years may inflict painful tax implications.”

While the fund managers themselves are not responsible for the tax implications for investors, advisers who are choosing funds for investors are holding these factors in close consideration.

“From an adviser’s perspective, unwittingly triggering a needless tax liability is not a great look, particularly for their largest and most valuable clients,” Evan-Cook said.

“The risk of doing this is considerably lower when holding a fund of funds instead of an MPS. This is a factor we know many advisers are thinking more about, and is partly why the pendulum is, we think, beginning to swing back towards unitised portfolio offerings such as funds of funds.”

MPS gained popularity due to their transparent nature, with investors able to see a full breakdown of their underlying investments at any one time rather than relying on a quarterly, or monthly statement. There are pros and cons to both, with investors in an MPS owning the underlying units of these holdings themselves, but paying a management fee plus the charges from the underlying funds. The costs of managing a fund of fund is packaged up into its ongoing charges figure.

For advisers, concerns around switching out of an MPS and into a multi-asset fund would likely only come after clients had maxed out their ISA allowance of £20,000. The same is true of their clients’ pensions, which have an annual tax-free allowance of £60,000 from April 2024, up from £40,000 previously. This number does however reduce for those with an income over £260,000, whose allowance decreases by £1 for every £2 above the threshold up to £320,000 in income. Funds left over after these categories would likely fall into general investment accounts.

Jock Glover, strategic relationships director at Square Mile Investment Consulting and Research, said: “It does mean that the tax burden could be substantial because, at the start of the reduction process, HMRC was estimating another 235,000 people will end up reporting CGT. Their estimate was that by 2025 these tax changes would generate another £1.2bn for the Treasury.

“In other words, for an MPS manager, it isn’t their role to worry about the tax planning for the underlying client. That is the role of their adviser. In terms of the impact on the underlying clients, it will depend on what wrapper their assets are in. If their MPS is wrapped in a tax efficient vehicle like a SIPP or an ISA, then there is no impact, under the current tax rules. If it is held in a general account, then they, or their adviser, will need to manage any capital gains that are created over the course of a tax year by the underlying manager selling holdings from the portfolio.”

This article was written for our sister title Portfolio Adviser

The Novia Global Stocks and Shares Isa has been designed to help expats invested in Isas who can no longer add additional funds, and any gains derived from the Isa, as they could be subject to tax in their country of residence – a concept called ’suspended animation’.

The offering is intended to plug what Novia Global called “a significant gap in the market” by allowing Britons who have moved or work abroad to have their Isas managed alongside their other assets.

According to Novia, the new Isa is also suitable for expats who plan to – or who could – return to the UK and would subsequently benefit from a tax-efficient product.

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Novia was recently approved by the HMRC as a UK-registered Isa manager, meaning expats can transfer their existing Isas and incorporate them into broader Novia accounts.

“The problem of expats’ Isas entering what amounts to a state of suspended animation has been recognised for some time,” said Chris Skelhorn, sales director at Novia Global.

“We know from our conversations with advisers and clients that it has been a matter of frustration, particularly since so few meaningful efforts have been made to tackle the issue,” he added.

“It’s still the case that only UK residents can set up or contribute to an Isa. The starting point here is to transfer an existing Isa, not to open a brand new one.”