After 20 years of tax-free saving opportunities, James Johnsen - Head of Private Clients, asks what more can be done to develop ISAs
April 6th marked the twentieth anniversary of the birth of the Individual Savings Account (ISA). Launched to great fanfares by the then youthful Gordon Brown (yes, he of the pledge to end the cycle “Tory boom and bust”), it was in fact a re-packaging of the old Personal Equity Plan initiated by Conservative Chancellor, Nigel Lawson, in 1987.
For Lawson, the aim was a simple one: get people to take more control of their financial futures, save more and gain a direct ownership stake in UK Plc. Alas, despite the articles highlighting the advent of the ‘ISA millionaires’, the percentage of private share ownership has declined steadily since then and currently hovers at a little over 12%. In numerical terms, around £600 billion of assets are held in ISAs although c. 11m ISA accounts are opened every tax year.
Various ideas have been mooted to give ISAs a re-boot. One is to make contributions tax-deductible, similar to pension contributions. Expensive initially for HRMC (less income tax taken), but a good way to boost the savings ratio which has halved, as a percentage of GDP, over the past two decades as we cheerfully continue spending on credit cards. Another is to extend the tax breaks to include IHT, as well as income tax and CGT. This logical extension would really provide a powerful incentive for long-term investment and saving. A final idea is to open up ISAs to crowdfunding equity schemes that channel money into start-ups and micro-caps. This would help widen the pool of capital available to entrepreneurs and sow the seeds for the future health of our economy.
Whatever, stocks and shares (investment) ISAs need to be seen as the gold standard for building up of core, long-term capital, especially with cash ISAs – like ordinary deposit accounts – offering a negative ‘real’ return, i.e. after taking inflation into account. With so many platforms and funds now enabling ISA investment plans to be initiated with very low starting sums and offering regular saving schemes, little acorns can be easily established. And for those with significant portfolios exposed to the chill winds of ever-rising levels of taxation, it does not take long to shelter the whole from the depredations of HMRC, especially for couples who can shelter £40,000 of existing assets each year.
If more paid attention to this, then articles about ISA millionaires would soon become irrelevant. And for an investment manager, managing a portfolio within an ISA wrapper is a dream compared to the constant worry and restrictions of CGT.
Come on Chancellor, stop hand-wringing over Brexit and deliver something with real and immediate benefits to all: give ISAs a much-needed birthday boost.