The British ISA has been scrapped – What other opportunities are out there?

The British ISA has been scrapped before it got  off the ground, with the Labour government confirming that plans for the specialist stocks and shares ISA will be dropped.

It was initially introduced by the previous Conservative government as a way to incentivise investment into British businesses. The British ISA would have provided investors a £5,000 tax-free allowance, in addition to the standard £20,000 which can be paid into ISAs every year.

The reality is that the British ISA would likely have been quite far down the tax-wrapper pecking order for most investors. A standard stocks and shares ISA offers all the same tax benefits, without restricting investments to one market.

Pension funds too, are a tax-effective investment wrapper which allows a much wider range of assets   than just UK companies. Between them, investors can contribute up to £80,000 per year into these accounts (£20,000 ISA annual allowance and pension contributions of 100% of earnings, up to a cap of £60,000).

For a couple, that’s potentially up to £160,000 in annual contributions before the need to look for alternatives. At this point, investors might consider options such as Venture Capital Trusts, which can offer even more tax incentives than an ISA, although they come with greater risks and a greater chance of losing money so they aren’t suitable for everyone, and advice should be sought.

While the British ISA would have provided an interesting opportunity, the take up of the account could arguably have been quite limited anyway. There remains a wide range of options to invest tax-efficiently or increase exposure to British companies.

Here are some alternatives to consider, though please note that any investments you make will put your capital at risk and the value will go down as well as up.

The key incentive for the proposed British ISA was self-evident, with the potential to access an extra £5,000 in tax free allowances each year. However, this was only ever going to be a fairly peripheral component of any financial plan, with many other tax-efficient investment accounts still available for investors.

Remember that the tax treatment for all of the products below depends on individual circumstances and is subject to change.

Investors will still have access to their usual ISA allowance (pending any potential changes in the upcoming Autumn Budget) of £20,000. This can be split across various different ISA types, including stocks and shares ISAs, cash ISAs, lifetime ISAs and the lesser-known innovative finance ISA.

Worth noting is that ISA allowances are based on individuals, so a couple can contribute up to a total of £40,000 per year into tax-free accounts.

For those with children, using a Junior ISA increases this by a further £9,000 per child. However, be aware that they will automatically gain access to the funds once they turn 18.

Another common tax-efficient investing option is to use a pension. Not only do you receive tax relief on any contributions made up to the annual allowance, or 100% of your earnings whichever is lower, but the funds will also grow tax free until you can access them at age 55 (increasing to 57 in 2028).

Once you decide to withdraw from your pension, you can take up to 25% of the amount free of tax (currently up to a limit of £268,275).

There is currently speculation that pension rules could change in the 2024 Autumn Budget.

For investors who are prepared to take a high-risk approach with a portion of their assets, VCTs and EISs are options that provide many tax benefits although they come with greater risks and are not suitable for everyone.

These benefits include 30% income tax relief (provided VCTs are held for 5 years and EISs held for 3 years), tax free dividends, tax free capital growth and potentially exemption from inheritance tax in the case of EISs.

The trade-off for these tax benefits is that the investments are in early-stage companies, which are high risk, often illiquid and you could lose your total investment. It is usually not possible to sell the investments until a company has an exit, with a typical holding timeframe of five to 15 years.

VCTs and EISs aim to facilitate investments into growth stage UK-based companies.

These schemes were originally scheduled to close in 2025 but have recently been extended until 2035¹.

For some investors, the appeal of the British ISA may have extended beyond the tax benefits. One of the stated aims of the new account was to encourage investment into British companies, offering the potential to boost economic growth.

However, there’s nothing to stop investors from working with their investment manager to make these changes themselves. There are many investment trusts, funds and exchange-traded funds (ETFs) which focus on the UK stock market, in addition to direct purchases of equities listed on the London Stock Exchange.

Investors who are looking to make a greater investment into UK companies should understand the risks that come with this decision.

The UK stock market represented 3.7% of global market capitalisation in 2023², meaning that any portfolio holding a higher percentage of its equity investments in UK companies could be at risk of underperforming the broader market.

However, there are some arguments to suggest that UK companies look more attractive to investors than they have for some time. Many of the largest companies listed on the London Stock Exchange have an international focus, rather than a sole reliance on the British economy.

Valuations of UK listed companies have been depressed for some time, and now, in our opinion, look quite favourable compared to other markets around the world. Of course, while these are points our Investment Managers consider very closely, investors should ensure they’re making investment decisions for the long term, not trying to time the market with short term trades.

Any good financial plan and investment strategy should consider personal preferences and broader objectives. These can include investing in home-grown companies, investing in companies with positive environmental records, or avoiding companies involved in certain sectors.

We take these investment preferences very seriously  at Evelyn Partners. We can help you create a financial plan and investment strategy that not only aims to meet your financial goals but does so in alignment with your values.

If you have any questions about your own financial plan or investment strategy, speak to your usual Evelyn Partners contact, book an initial consultation online or by calling 020 7189 2400 .

¹ GOV.UK Boost for UK growth as start-up investment schemes extended, 4 September 2024

² Statista Global stock markets by country 2023, 19 March 2024