BlackRock
Updated 28 Jun 2024
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This is a non-independent marketing communication commissioned by BlackRock. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

In March 2024, the government announced the introduction of the UK ISA, which will provide a new tax-free savings opportunity for savers to invest in the UK, while supporting UK companies. Here we examine what we know about this extension to the highly successful, tax-efficient Individual Savings Account (ISA) and explain why we believe it could be important for UK investors.

What is the British ISA?

In the 2024 Spring Budget, Chancellor of the Exchequer, Jeremy Hunt, announced the introduction of the UK ISA. This represents an opportunity for investors to shelter a further £5,000 from the tax authorities annually, on top of the existing £20,000 annual ISA allowance, as long as this additional amount is invested in the UK.

As is typical with new policies, the concept is currently under “consultation”, which means the investment industry and other interested parties can help shape the precise design and implementation of the policy, making it fit for purpose and as effective as possible.

One key debate revolves around the exact definition of what should be considered a “UK company”. The proposal suggests that any business that is incorporated in the UK and listed on the UK stock market should be included. However, some industry commentators have argued that the policy should exclude companies that conduct most of their activities overseas. That would mean, the argument goes, the impact of the policy can be more directly focused on British businesses and the broader UK economy.

Meanwhile, the qualification of investment trusts will also require clarity. These are listed on the UK stock market, but many of them are focused on investment opportunities elsewhere in the world. For example, BlackRock manages a range of nine investment trusts, but only three of these are specifically focused on opportunities in UK equities.

The consultation process comes to an end in June 2024, so we don’t have long to wait for these finer details. In the meantime, we know that the Association of Investment Companies (AIC), the industry body that represents and promotes the investment trust sector, is calling for all UK-listed investment trusts to be included1.

Why is the British ISA being introduced?

The UK equity market has had a difficult run in recent years, and this has left many UK-listed businesses trading at a significant discount to similar companies that are listed elsewhere.

UK stocks trade at a significant discount to global peers

Source: Morgan Stanley to 31 December 2023

While this substantial discount persists, however, foreign companies and private equity are seeking to capitalise on the depressed prices they can find in the UK. Barely a week passes without news of another well-known UK company being acquired from overseas. Indeed, merger and acquisition activity may be a catalyst for better performance from UK stocks, but it may not be enough on its own. Hence, policymakers are looking to intervene, anxious about the implications for the health of the economy and stock market should UK businesses continue to be acquired.

Many in the industry have also called for proactive measures to encourage domestic investors to reallocate capital towards UK equities, in order to strengthen this important part of the country’s financial infrastructure.

Why is it important for UK investors?

The overall aim of the British ISA is ultimately to encourage more demand for UK equities. Stock markets are balancing mechanisms through which the forces of supply and demand find an equilibrium through movements in price. The so-called “invisible hand” of the market moves prices higher when there are more buyers than sellers. A higher share price incrementally encourages more sellers and deters a few buyers until equilibrium is restored. The same thing happens in the opposite direction should sellers of a stock outnumber buyers.

All else being equal, encouraging more demand for UK equities therefore equates to the prospect of higher prices and valuations for British businesses. However, it remains to be seen as to whether the policy stimulates enough demand to make a meaningful difference. Critics suggest that, at £5,000 per person annually, the size of the additional British ISA allowance is too low to make a big difference, and the number of savers who are fortunate enough to be able to fully utilise their ISA allowance each year is too small.

If there is an impact, it is perhaps likely to be felt most significantly by smaller UK listed businesses, where a small amount of additional demand could make a meaningful difference to share prices. Two of BlackRock’s three UK-focused investment trusts are explicitly targeting these smaller companies.

Overall, perhaps the policy should be seen as a positive step in the right direction. The fact that policymakers are trying to address the undervaluation of UK equity is encouraging and, in time and with other measures, it could signal the start of a period of better long-term performance from the UK stock market.

In conclusion, the British ISA should be seen as a helpful addition to the savings regime. It means investors have the opportunity to shelter even more of their savings from the tax authorities. That makes it a quick win for savers, and potentially an even bigger win for the UK economy and stock market over time.

1 Source: AIC – Spring Budget 2024 press release – 06/03/24

Risk warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Important Information

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2024 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, and iSHARES are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

MKTGH0424E/S-3474993

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