In the run-up to the Autumn Statement, Chancellor of the Exchequer Jeremy Hunt has indicated a desire to widen the scope of individual savings accounts (ISAs). Inevitably, this has led to a great deal of speculation and rumour as to exactly what he might attempt or achieve.
It may help to commence with a brief revision course.
There are currently four types of ISA:
- cash ISAs
- stocks and shares ISAs
- innovative finance ISAs, which include peer-to-peer loans and crowdfunding debentures
- lifetime ISAs (limited to cash and stocks and shares), theoretically designed to enable 18–40-year-olds to get on the housing ladder or act as a quasi-pension.
Individuals can save up to £20,000 in one type of account or split the allowance across some or all of the other types.
Additionally, Junior ISAs covering cash and stocks and shares with a £9,000 limit are available for under 18s but have not made it into the current conversation.
There is a limit of only £4,000 for lifetime ISAs, which benefit from a 25% government-funded uplift, but are highly restrictive. Unless investors are willing to accept a 25% penalty, money can only be withdrawn and used for the purchase of a first home worth up to £450,000 or else after age 60.
The big attraction of ISAs comes in the form of tax breaks. Holders of accounts do not pay tax on:
- interest on cash in an ISA
- income or capital gains from investments in an ISA.
Possible changes in store
The most obvious change would be to lift the £20,000 annual limit. While an increase might look generous, in reality it would be costly to the Exchequer and impact a limited number of people and each of those, by definition, would at the very least be relatively wealthy.
Therefore, more nuanced changes are being mooted, generally with the goal of increasing the proportion of ISA investments that are held in stocks and shares rather than cash. This would echo attempts by (most commonly Conservative) prime ministers and Chancellors in the last century, who were keen advocates of wide private share ownership.
One suggestion that could prove attractive to Mr Hunt is the abolition of the current requirements for separate cash and share ISAs. This would remove an administrative barrier and allow instant transfers between categories within a single account. Such a change could be a double-edged sword, since while it might theoretically increase the amount invested in stocks and shares, the opposite could as easily be the result.
Another idea would be to introduce ring-fenced ISAs holding nothing but investments in UK companies. This could obviously be refined to limit investment to quoted companies, smaller companies or any other designation. Whether investments in such funds would add to the £20,000 annual ISA limit or be permitted on top, say adding an extra £10,000, will be a decision for the Chancellor.
Recent controversy
There has been a recent controversy regarding the permissibility of including fractional shareholdings in ISA accounts. HMRC has ruled that the legislation excludes such holdings but that interpretation is currently subject to a prospective challenge in the courts. A change in legislation to clarify the position might be welcome. Realistically, this is unlikely to have a material impact on more than a handful of investors.
As explained above, the rules regarding lifetime ISAs often make them impractical so one positive measure could be a relaxation of some of the limits or even a more drastic rethink.
Many in the London area might question whether £450,000 is enough to buy the first home of their dreams. Even if this were enough, with a volatile housing market and the need to provide a hefty deposit, there is a question as to whether annual savings of £4,000, even when enhanced by interest/capital gains, can provide adequate funds in time to make the critical decision.
Looking at the quasi-pension route, few 18-year-olds are excited by the prospect of a fund that they could only cash in in the mid-2060s unless they are willing to suffer a 25% tax charge on any amount withdrawn.
Finally, innovative finance ISAs have not proved popular and media rumours (leaks) hint that these may be withdrawn.
Economic and social impact
One could argue that, rather than the man or woman in the street, the major beneficiaries from tax-free ISA accounts are actually banks, investment houses and financial advisers. Each of these might presumably boost its business significantly if additional government funds were plunged into these arrangements. Further, the likely individual beneficiaries of any changes would be higher-rate taxpayers with money to spare – helpful for the blue wall but not the red one.
At a time when some backbenchers are clamouring for tax cuts, minor adjustments to ISAs could be an attractive cosmetic strategy for Jeremy Hunt. These will cost the Exchequer very little in the short term and please strident backbenchers.
On the other hand, it is difficult to see how changes to a scheme that has always had relatively limited appeal will prove to be a big vote winner.
