The recent FT Article (https://www.ft.com/content/99b91223-aced-4262-b7ff-356cee84a185) entitled “Reeves looks to include minimum UK shareholding in ISA overhaul. Evolution of abandoned Conservative ‘Brit Isa’ plan also includes stamp duty tax break”, suggests Stocks and Shares ISA investors should be required to hold 50% of their portfolio in UK shares and has, quite rightly, caused a stir.
While the main goal of these proposed changes to stimulate the British economy by encouraging investment in UK companies is a noble one, this particular plan is deeply flawed. As it stands, it would create an unfair, two-tier system that fails in its primary objective while penalising the ordinary retail investor.
The need for phasing this in
Let’s first address the practicalities. A sudden, overnight mandate for a 50% UK allocation would be chaotic: risking market valuation disruption as billions of pounds are forced into a limited pool of assets. Any sensible policy would need to be phased in. A gradual increase – perhaps rising to 50% over five or ten years – would allow the market to adjust and give investors time to re-organise their portfolios without making rash decisions.
(Some people have suggested the government might only apply the 50% to new ISA investments. This will mean the impact is tiny and, in my opinion, not worth the effort of doing it. Nudge theory perhaps, but unlikely to make much impact.)
But while a phased approach would soften the landing, it doesn’t fix the fundamental unfairness at the heart of the policy. The core problem is that this rule would only apply to ISAs.
The Great Loophole
The most significant flaw in the plan is that it creates a giant loophole for wealthier, more sophisticated investors – a classic case of regulatory arbitrage. Because the rule doesn’t extend to personal pensions (or SIPPs) or General Investment Accounts (GIAs), those with multiple accounts can simply sidestep the requirement.
Consider two types of investors:
* The Multi-Account Investor: This individual has an ISA, a SIPP, and a GIA. Their goal is a globally diversified portfolio with 20% in the UK. To comply with the new ISA rule, they don’t need to increase their overall UK investment at all. They can simply sell global shares in their ISA and buy UK ones, while simultaneously doing the exact opposite in their SIPP or GIA – selling UK shares and buying global ones. The net result? Their overall portfolio remains globally diversified exactly as they want it, and not a single new penny is invested in UK plc. The policy has completely failed to achieve its goal.
* The ISA-Only Investor: This person represents most prudent savers in the UK. Their ISA is their primary, perhaps only, investment vehicle for the future. They have no other portfolios to rebalance against. This investor, who may have diligently built a globally diversified portfolio within their ISA, will be forced to abandon their strategy. They must sell down their global holdings and concentrate their life savings heavily in the UK market.
An unfair burden on ordinary savers
The outcome is a deeply regressive policy. It would have little to no effect on the overall investment strategy of the wealthy but would force a significant, and potentially damaging, strategic change on millions of ordinary people.
It undermines the principle of diversification, which is a cornerstone of sensible long-term investing. By forcing ISA-only investors to concentrate their risk in a single country’s economy, the policy exposes them to far greater potential losses should the UK market (or sterling) underperform.
In essence, this proposal penalises the prudent, smaller saver while creating a mere administrative inconvenience for the rich. It fails to achieve its aim of boosting net investment in Britain and instead will weaken the financial resilience of the very people who need the benefits of global diversification the most.
I believe in educating and empowering retail investors (e.g. to consider the benefits of global diversification, the impact of currency movements and currency hedging and in which currencies they expect to spend in, in their lifetime), not restricting their choices and forcing them into riskier, less diversified positions.
The plan needs a fundamental rethink.
Cliff Weight, ShareSoc member and former Director. Cliff is a member of the ShareSoc Education Committee and Policy Committee
This article reflects the opinions of its author and not necessarily those of ShareSoc.
Equity savers wanting more than 50% outside UK shares can start a GIA alongside their ISA – the finance industry will be glad to help them. A UK resident aiming to pay less tax here should not expect full relief for investments in USA, EU, Dubai, India…
I don’t have a problem with ISA holders being required to have a *proportion* of the portfolio in UK shares, say 20-25%. After all, you are getting a tax benefit in the UK. Then the balance can be diversified elsewhere as I agree with Cliff that diversification is important. I also agree that it needs to be phased in.
The lack of investible “blue chip” UK companies is of greater concern to me.
If the British ISA were to happen it should be restricted to investments in funds and so limit the financial risk to the retail investor. However, even FTSE100 based funds could only offer limited diversity let alone “growth” potential which RR wishes to stimulate.
Tax on ISA profits is a far more sensible approach than restricting the investible ISA marketplace. However, if RR insists on “Buy British” she should take look to the Pension Funds which have about 4 x AUMs and access to experienced investment analysts; NOT ISAs.
Typical of the Law of Unintended Consequences, as created by those who have little ability to think deeply enough about the implications of what they wish to do. This lack of ability seems to be most prevalent among those who place rigid ideology above a real attempt to help those who appointed them.
Given a transition period of, say, three years, I believe a requirement to hold 50% by value of UK shares in an ISA is a fair trade for the benefit of paying no tax on dividends or capital growth on it all. If you wish more foreign equities, start a general investment account!