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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is the founder and managing director of New Financial, a capital markets think-tank.
When Jeremy Hunt announced plans for a UK ISA at last week’s budget, it echoed a similar proposal by one of his august predecessors as chancellor nearly 40 years ago.
Back in 1986, Nigel Lawson unveiled Personal Equity Plans, a tax-free investment account designed to help build a share-owning democracy in the UK. It has since morphed into the hugely successful Individual Savings Accounts, into which UK citizens have saved or invested more that £750bn. But there was a quid pro quo: in exchange for the tax breaks, at least half of all assets held in a PEP had to be invested in “qualifying UK assets”, which back then effectively meant UK equities or UK investment funds.
Given the provenance of the idea, it was surprising to see the ferocious pushback against the much more modest proposal to restore part of that quid pro quo. The idea was dismissed as an absurd flag-waving affront to free markets and an ill-conceived politically motivated gimmick that will fail to provide any meaningful boost to the ailing UK stock market. Much of the criticism seems to have been triggered by a genuinely absurd idea that has been floated recently to require all of the money tucked away in ISAs to be invested in UK equities.
But under the UK ISA proposal no one is being forced to do anything. If you are lucky and wealthy enough today to be able to max out your £20,000 tax-free ISA allowance, under the UK ISA proposal you would be able to invest another £5,000 free of tax — so long as all of that extra money is invested in UK equities. The aim is to provide a modest boost to demand for UK stocks with a small ask of those people who can most afford it.
The main concern that the government is distorting and directing investor behaviour appears to ignore the fact that the principle of conditionality on tax relief is already well-established practice in the UK and elsewhere. Should we abolish venture capital trusts, reintroduce stamp duty and inheritance tax on stocks on London’s AIM market, and impose capital gains tax on gilts? Maybe governments in Australia, France, Italy, Japan and the US have got it wrong — to a greater or lesser degree — by offering incentives to domestic investors to invest in domestic assets?
The concerns expressed about forcing investors into underperforming UK equities would hold more water if anyone was being forced to invest in UK equities against their will. Over the past decade the total return on the S&P 500 of more than 200 per cent is three times higher than the UK market.
But no doubt the 800,000 or so fortunate individuals who can afford to max out their stocks and shares ISAs are sophisticated investors who are already amply diversified in the rest of their portfolio. Maybe some of them will reshuffle their existing ISAs or pensions to move qualifying UK assets into UK ISA. If so, then hurrah: the government has effectively extended the ISA allowance by 25 per cent and set a floor of a 20 per cent allocation to UK equities.
A more valid critique is that lots of “UK equities” aren’t actually UK companies or have limited activities in the country (such as miner Antofagasta or trading house Glencore). But the vast majority of the 1,500 or so domestic companies listed in the UK are British companies with significant operations here.
Maybe the problem is that UK ISAs won’t pack a big enough punch. If everyone eligible subscribed to a UK ISA it would channel £4bn a year into UK equities ((although realistically it would probably be less than that), which is small change compared with the £2tn or so market capitalisation of domestic UK stocks.
Yet when you look at flows, even half that amount would help reverse the estimated £14bn withdrawn from UK equity funds last year or boost the £9bn or so in annual flows by UK pension funds into UK equities. That a UK ISA won’t save the UK stock market on its own is self-evident, but every little bit helps. Rebooting the UK stock market after decades of decline will need a wide range of measures on both the supply and the demand side, as well as reforms to the wider economy.
And finally, over the years ISAs have mutated from a simple product into seven different versions as governments have bolted on new variants to address the political priorities of the day. Perhaps we should go back to basics and collapse the different ISAs into a single product called an ISA. And while we’re at it, maybe we should go back to the future and, like Lawson, require half of that money to be invested back into the UK market.
