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20 November 2023

Autumn Statement 2023: Chancellor on the Hunt to reform UK ISAs?

This article was taken from the autumn issue of the 1875. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications

Chancellor Jeremy Hunt is endeavouring to amend the UK’s Investment Saving Accounts (ISAs) to encourage more savers to invest, especially in UK companies. The ISA is a tax-free savings account which allows the saver to keep income and capital growth generated from it. Concrete details are anticipated in the run-up to November’s Autumn Statement at the time of writing. Any changes will likely focus on increasing individual participation in the stock market and improving the valuation of UK equities, which have long been trailing behind their global counterparts.

The proposed plan for increasing share ownership focuses on streamlining the ISA structure, by allowing savers to hold both the cash savings and stocks and shares ISAs in one account. This could prompt an uptake in ISA subscriptions by enabling savers to control their investments with greater ease and convenience. Moreover, such a move may convince more ISA holders to store their assets in stocks and shares, rather than cash which, between 2021-2022, comprised 38% of the £741.6bn market value of all ISA holdings.

On top of this, there are signals that both the Innovative Finance ISA and Lifetime ISA (LISA) could be tweaked as industry leaders believe the convoluted and restrictive nature of both schemes has deterred many from transferring savings into them. The LISA revamp could encompass either a reduction in the early exit penalty, from 25% to 20%, or a separation of the £4,000 LISA annual contribution limit from the yearly £20,000 ISA allowance. Such reforms could be particularly beneficial to the self-employed, who could utilise the LISA investment vehicle as a means of expanding their pension pot savings.

Unfortunately, for the Chancellor, there are a few headwinds on the horizon which may curtail the efficacy of the foregoing reforms. HMRC’s recent insistence on the non-ISA eligibility of fractional shares has been perceived as a major blow for young and first-time investors, if it is upheld at Hunt’s Autumn Statement. As the name suggests, fractional shares enable investors to purchase parts of a company’s shares. For instance, an investor could spend £100 to purchase a fractional share of Microsoft, rather than the full £270 necessitated for one complete share. The benefit is a lower barrier to entry for investors with smaller pots of capital and the chance to build a more diversified portfolio. Removing fractional shares from the tax-free ISA wrapper would diminish their appeal and generate a barrier for many younger people trying to save and invest, an important habit for the younger generations to develop, especially amongst the backdrop of an incrementally ageing population. However, this issue could be remedied quickly, if the Chancellor clarifies the rules at November’s Autumn Statement.

A factor the Treasury cannot control is the receptiveness of the population to the reforms. Past initiatives like the “Tell Sid” Privatisation and 1999 ISA launch have failed to halt the gradual decline in private share ownership, which declined from 54% in 1963 to 12% in 2020 of companies listed on the London Stock Exchange (LSE). The timing is also not overly favourable, as many households will be reluctant or unable to allocate extra funds towards long-term investments due to economic uncertainty. Although, the steep reduction in the capital gains and dividend allowance should help convince investors to shift investments into the more tax-efficient ISA if they have not already exceeded their annual allowance.

Chancellor Hunt’s ISA reform is likely a part of the Government’s strategy to divert additional funding into domestic firms, with reforms in other areas of the economy also being steered towards the same objective, such as the proposed Mansion House Reforms, seeking to channel part of the UK’s £2.5tn pension market into unlisted UK companies.

The aforementioned single cash and shares ISA should attract new investors and persuade existing ones to hold more of their savings in equities, rather than cash ISA deposits. Even though, an increase in ISA held shares could indirectly benefit UK companies, with Hargreaves Lansdown estimating that approximately three quarters of its ISA client portfolios consist of UK equities, there is speculation that another type of ISA, created solely for investing in UK companies, could be introduced. This would likely take the form of a separate annual ISA allowance for domestic companies, helping direct interest towards the UK equity space.

Despite the plan appearing to make sense, it would add further complexity to the ISA structure, which would be diametrically at odds with the initial motive behind the reform, to eliminate complexity and promote greater participation in the scheme amongst savers. Additionally, a revamp of transaction reporting to HMRC would have to follow suit, along with high levels of interest and engagement with this new type of ISA, for it to have any noticeable impact on the valuation of UK companies. This is because over half of the London Stock Exchange’s share ownership originates from overseas investors. Therefore, any attempt to noticeably increase the share price of UK listed companies would require a positive shift in foreign sentiment towards UK firms.

Regardless of the specific steps the Chancellor decides to take, it is probable that the reform will not generate any drastic changes in ISA holdings or UK equity valuations in the very short run, especially considering the current uncertain economic backdrop. However, an improvement in macroeconomic conditions, encompassing a drop in inflation and interest rates, could allow the new ISA framework to help facilitate an uptick in investment activity within the population in the future.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. Investments and income arising from them can fall as well as rise in value. Past performance and forecasts are not reliable indicators of future results and performance.
Please note that tax treatment depends on the specific circumstances of each individual and may be subject to change in the future.
 
 
Autumn Statement 2023: Chancellor on the Hunt to reform UK ISAs?

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