How would a UK ISA work in practice?

MRM head of news and content Paul Thomas imagines how a UK ISA might look with the Treasury’s consultation set to close on 6 June.

One of the more headline-grabbing initiatives ministers have come up with to boost our flagging stock market is the so-called UK Individual Savings Account (ISA).

In essence, the UK ISA will give investors an extra £5,000 tax-free allowance to invest in homegrown assets. This is in addition to the existing £20,000 annual allowance.

Ultimately, the idea behind it is simple: by encouraging savers to back domestic firms, it will boost London’s appeal as a listing destination.

With a general election around the corner – and a potential new government soon in charge – there had been doubts as to whether the UK ISA would ever see the light of day.

However, with Labour committing to the project on record just this week, we can safely assume it is on its way in some form or another.

But how exactly might it work?

Unfortunately, we don’t have the answers to that yet, but HM Treasury’s ongoing consultation provides us with some hints.

We know British company shares will be eligible for inclusion, given the Government wants to boost investment into domestic firms.

But what counts as a British firm? The Treasury has suggested it may use Personal Equity Plans (PEPs) – the forerunner to the ISA – as a template.

To qualify for inclusion in PEPs, a firm had to be incorporated and listed in the UK. Therefore, it’s likely the new UK ISA will take a similar approach, unless the definition is watered down.

Given the UK ISA is also designed to boost economic growth, the Treasury might also have insisted that firms make a certain percentage of their revenue or hold a certain portion of their assets in the UK.

However, that would be hard to police, can change over time and, as the Treasury admits, would needlessly complicate things, so it has been ruled out.

What about other types of investments? The Treasury has left the door open for the inclusion of other types of assets, such as gilts, UK corporate bonds and collective investment schemes.

Again, if the Treasury decides to allow funds to be included in the UK ISA, PEPs provide a ready-made template.

For example, authorised unit trusts and investment trusts may be allowed if, say, at least 75% of the fund’s investments were in eligible UK companies.

Another key question is what happens to those investors who already hold UK assets in their Isas. Will they be able to transfer them from a general ISA to the UK ISA?

The simplest option would be to say no, although the Treasury admits that would cause confusion as it would lead to two sets of transfer rules.

Therefore, it’s likely that transfers will be allowed, although the Treasury needs to decide whether to allow transfers up to the £5,000 subscription limit or allow unlimited transfers.

That’s the technical side covered, but when are we likely to see the UK ISA hit the shelves, so to speak?

The Treasury’s consultation runs for another week, and then it will likely take several months to digest the responses and design the rules.

There also needs to be a bedding in time for providers – it’s not just a case of flipping a switch. They will need to ensure their IT and reporting systems can handle the new ISA, which takes time.

Therefore, we should not expect it until the start of the new tax year in April – at the earliest.