With the possibility of a British Isa being launched later this year, and the consultation now closed, a lot has been written about whether this Isa will achieve its aims of increasing investment into UK companies. There is also a very likely scenario of a new government.
So, if this new Isa product progresses, what are the practical implications of the British Isa?
Two key elements of an Isa are its annual subscription level and the permissible assets allowed under the product, all wrapped in a tax efficient wrapper. It is the responsibility of the Isa manager to ensure that a customer does not oversubscribe and that the investments chosen are valid for the type of Isa selected.
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For the British Isa, these two elements will continue to be important. The proposed £5,000 annual subscription limit, investing into UK only assets, will need to be managed. Presumably the British Isa will sit alongside the list of other available Isa options, such as:
- Stocks and shares;
- Cash;
- Lifetime;
- Innovative finance; and
- Junior.
This will essentially ringfence the British Isa – making it easier to manage, but there will be challenges to overcome.
Diversifying investment risk
Investing in different asset types and different sectors enable diversification in an investment portfolio, with the flexibility to manage performance by switching out and/or rebalancing the portfolios periodically depending on portfolio performance and market conditions.
A British Isa will be restrictive here – so questions need to be asked about:
- How can customers effectively manage poor performance?
- Will the rules allow the UK Isa to be rebalanced, and any gains to then be reverted to a traditional stocks and shares Isa, to maximise the ability to diversify?
- Or will customers need to transfer to a different type of Isa to achieve this?
Creating a dependency on a UK market that might be going through a recession or some other turmoil limits the ability to diversify investment risk when global equities and funds are off the table.
Transfers
Currently transfers are permitted freely between Isa types and Isa providers, enabling partial or full transfers of transactions made in the current or in previous tax years.
Any limitations on this for the British Isa could add in another layer of complexity for Isa managers having to deal with differing rules.
The industry will need to know how different subscription levels will be managed effectively. Adding any restriction to the free movement of Isas could create an impact to customers who expect this to be a feature with this type of product.
Discretionary management
There could be further impacts on Discretionary Fund Managers (DFMs) who may need to create separate discretionary models for the UK Isa.
The models would need to span different risk and investment management profiles, ensuring no cross over to non-UK assets.
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Creating specific models for the product’s rules will increase the management overhead of the underlying investment suitability and performance.
Invalid Isas
Aside from these considerations, how will the British public deal with understanding another Isa type?
While the complexity of only being able to hold certain types of Isa in the same tax year has now been removed, is the British Isa just adding some of that complexity back in?
It could increase the volume of Isas needing to be made void due to a lack of knowledge and understanding of the average investor, unless they are being advised or guided by an advice process.
Conclusion
There has been great debate as to whether this product will achieve its objectives, and whether this type of Isa would be appealing to the average investor.
There is an argument to suggest that it will be more relevant for a customer who has maxed out their £20,000 Isa annual subscription and can reap some further tax benefits on an additional £5,000 investment.
Ahead of the UK general election, the business case for the British Isa is weak and the objective to encourage investment into UK companies could be achieved in other ways if this was really a priority.
Time will tell, but as an industry we need to keep it simple and not create an unnecessary operational burden in the unlikely event this moves forward.
Jayne Brown is lead consultant at Simplify Consulting
