British ISA – All you need to know

Table of Contents

In the Chancellor’s Statement in March 2023, the creation of a British ISA (or Great British ISA) was announced.

This will give an extra £5,000 annual allowance in addition to the existing £20,000 annual ISA allowance. Current proposals mean that it will only be applicable to Stocks and Shares ISAs.

The British ISA is intended to encourage more investment into British companies. To achieve this objective, it’s expected that the British ISA will have some different rules to the current Stocks and Shares ISA rules.

In this guide to the British ISA, we’ve combed through the government’s proposals to explain what a British ISA is and how it’s expected to work. 

Table of Contents

What is a British ISA?

The government currently also refers to the new British ISA as a ‘UK ISA’, and others have called it a ‘Great British ISA’. 

Regardless of the name, it’s a new type of Individual Savings Account (ISA) designed to encourage more investment into British equities.

It was announced at Spring Budget 2024 (6th March 2024) that the UK ISA will be a new ISA with its own £5,000 annual allowance in addition to the existing £20,000 annual ISA allowance.

This implies that holding a British ISA in addition to a regular Stocks and Shares ISA will give you a total annual allowance of £25,000, which is £5,000 more than the current ISA allowance. 

However, it’s not yet clear whether you will always need a standalone British ISA with its £5,000 annual allowance, or whether qualifying investments could form part of an existing Stocks and Shares ISA. At the moment, the government is implying it will be the former.

The latter would imply taking the Stocks and Shares ISA limit up to £25,000 but there may need to be additional compliance checks by ISA providers to ensure investments are in accordance with the British ISA rules.

Under current proposals, you will only be able to invest in “UK companies” in a British ISA. However, this may include UK government and corporate bonds and UK-focused funds as well as British stocks and shares. 

How exactly “UK companies” will be defined is subject to consultation. More on this later.  

How will a British ISA work?

Currently, it’s proposed that a British ISA will be a standalone Stocks and Shares ISA that can be opened by UK residents over the age of 18 – the same as with current ISA rules.

But, the annual allowance will be £5,000 in a British ISA and it’s in addition to the existing £20,000 annual ISA allowance. This means you’d be able to invest up to £25,000 per year if you use your full ISA and British ISA allowances.

All income and gains made within a British ISA will be free from income and capital gains tax, again just like current ISA rules.

You’ll only be able to invest in UK companies, though. Some of the rules around ISA transfers and holding cash may also be bespoke for the British ISA, therefore differing from current rules.

What is a Stocks and Shares ISA?

A stocks and shares ISA is a type of Individual Savings Account (ISA) which allows you to invest in shares, funds and bonds. It’s also sometimes known as an investment ISA.

An ISA is a government approved savings or investment account which allows you to save or invest without paying tax on income or gains received within the account. This makes ISAs a great way to invest and build your portfolio over time.

The government wants to encourage people to save money, particularly for retirement, which is why it approves ISAs as a tax-free way to buy shares and invest your money. 

For people wanting to save or invest for the long term, opening an ISA is usually one of the best options to get started. 

You must be aged 18 or over and be a UK resident to open an ISA.

ISA Rules

There are 4 types of ISA that you can open:

  • Cash ISA
  • Stocks and Shares ISA
  • Lifetime ISA
  • Innovative Finance ISA

The British ISA will be in addition to these.

Within a stock and Shares ISA you can invest in:

  • Shares (sometimes known as stock)
  • Bonds
  • Funds

The types of funds you can invest in include mutual funds (unit trusts), investment trusts and Exchange Traded Funds (ETFs).

You can open one new ISA of each type per year, except for a Lifetime ISA which you can only open once. But there’s no limit to the total number of ISAs you can hold of each type, so long as you don’t pay into more than one of each type in a single year.

You’re also able to transfer existing ISAs to other providers, and that includes the ability to transfer Stocks and Shares ISAs.

There’s also a Junior ISA for children which can be opened by a parent or guardian. Read more in our guide to the best Junior Stocks and Shares ISAs.

Annual ISA Allowance

You can contribute up to £20,000 per year across your ISAs. This can be split between a Cash ISA, Stocks and Shares ISA, Innovative Finance ISA and a Lifetime ISA.

But, Lifetime ISAs have an annual limit of £4,000, which counts as part of your overall £20,000 annual allowance.

The annual allowance runs from 5th April to the 6th April each year and can be changed by the government, and as mentioned above you can only pay into one of each type of ISA in a given year.

For example, you could open a new Cash ISA and a new Stocks and Shares ISA in one year. You can then split your annual allowance of £20,000 between the two of them if you wish.

In the next year, you could open a new Cash ISA and a new Stocks and Shares ISA. But, you can then only pay into one of the two Stocks and Shares ISAs in each year going forwards.

Similarly, you can only pay into one of your two Cash ISAs in any given year.

A British ISA will have its own separate £5,000 annual allowance. That means a combined annual allowance of £25,000 if you hold both a UK ISA and a regular ISA.

Stocks and Shares ISA Summary

Here’s a quick summary of current ISA rules:

  • You can open one new Stocks and Shares ISA each year
  • The annual contribution allowance is £20,000 across all of your ISAs
  • You can invest in shares, bonds and funds in a Stocks and Shares ISA (dependent on your provider)
  • Gains and income generated within an ISA are free from capital gains and income tax for most people
  • You’re able to transfer your Stocks and Shares ISA from one provider to another if you wish, for example to a cheaper ISA platform
  • Most providers allow you to set up a direct debit or standing order to make regular monthly contributions to your ISA account

If you seek to maximise your annual allowance and pay in as much as you can each year to a Stocks and Shares ISA, you could build up a sizeable investment portfolio.

Because the income and gains are tax-free (for most people) you can reinvest all of these proceeds which means more of your money is working for you, compared to a non-ISA investment account where you may have to pay tax.

Read more in our guide to the best Stocks and Shares ISA for beginners. Or, if you want to get started with a low-cost ISA then read our guide to the cheapest Stocks and Shares ISA.

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What are the British ISA rules?

Broadly, the British ISA is expected to follow the same rules as the current ISA rules. But the expectation is that it will require its own set of rules around transfers and holding cash (more on cash in the next section).

Transfers in to a British ISA

For transfers into a British ISA, there are a number of proposals. One is to simply not allow other types of ISA to be transferred to a British ISA – this would be the simplest rule.

The government is also considering, alternatively, whether to only allow transfer in only up to the value of £5,000, the British ISA limit. 

However, it’s also considering no limit on transfer values, but thi could require more admin to ensure the investments meet the British ISA investment criteria (more on this next).

Transfers out of a British ISA

It may need its own transfer-out rules to prevent people contributing the maximum £5,000 into a British ISA and then transferring it into another type of ISA. 

The government is proposing that you can only:

  • Transfer from one British ISA to another
  • Release the funds within a British ISA and reinvest them within a British ISA
  • Or hold the funds outside the ISA. 

British ISA investment options

The purpose of the British ISA is to encourage you to use your annual ISA allowance to invest in British companies. 

But, the government is still to set out what it means by British, or UK, companies. This could mean companies who employ most of their staff in the UK or pay most of their taxes in the UK.

This would likely be challenging to implement as each company would potentially need to be analysed in isolation to see if it’s eligible or not.

Stocks and Shares

In its consultation paper, the government hints at how it may define UK companies: “the approach could be to define eligible UK companies as ordinary shares in companies that are incorporated in the UK and are either listed on a UK recognised stock exchange or admitted to trading on a UK recognised stock exchange”.

It does appear likely, then, that it will include any investments listed on the recognised UK stock exchanges:

  • Aquis Stock Exchange
  • Cboe Europe Limited
  • The London Stock Exchange, including the Alternative Investment Market (AIM)

This means that equities listed on the FSE100, FTSE250 and FTSE300 indexes, as well as the AIM, are likely to be included as allowed investments.

Funds

So far, the government is also looking at how to allow investment into UK-focused funds, with the aim of incentivising investment into British companies. 

Its initial suggestion has been to allow British ISA investments in “authorised unit trusts and/or investment trusts if at least 75% of the value of the investments held by the fund were invested in eligible UK companies”

So, it’s likely that you’ll be able to invest in UK focused funds in a British ISA.

Corporate Bonds

Again, the government appears willing to allow investment in UK corporate bonds through British ISAs. 

Corporate bonds are debt issued by large companies which usually offer fixed interest payments to investors in return for buying into the bond. 

These would need to be issued by British ISA eligible companies (likely those that meet the criteria on UK companies above). 

Gilts

Although not directly supporting UK companies, the government sounds as though it’s willing to permit investment into gilts via a British ISA.

Gilts are debt issued by the UK government and are considered one of the safest types of investment. 

In our view, it’s likely to be the only type of investment mentioned so far that could yet be excluded from eligibility in a British ISA, as it does not directly finance UK companies.

Cash

The government has made it clear so far that it does not want cash or cash products to form part of the investment options in a British ISA. 

Investing in cash products would not support the policy objective of encouraging people to put their money into UK companies. 

But, holding cash in a British ISA for the purpose of investing will be allowed. It’s likely that there will be new ‘cash holding’ rules designed to discourage people from holding cash in a British ISA.

This could mean that tax will be payable on interest earned in a British ISA, or that no interest can be paid on cash held within a British ISA.  

Other investments

So far, those investments set out above are the only ones to be especially under consideration by the government. 

Part of the consultation launched by the government does, however, ask the question as to whether any other types of investment should be included. 

Are Stocks and Shares ISAs safe?

Stocks and Shares ISAs are considered one of the safest ways to invest your money. 

To offer a Stocks and Shares ISA, the provider must be registered and authorised by the Financial Conduct Authority (FCA). 

There are additional regulatory checks and procedures an investment provider must comply with to offer a Stocks and Shares ISA compared to a General Investment Account. 

This is because ISAs have tax incentives which are approved by HMRC and ISA providers must also complete compliance checks directly with HMRC. 

Stocks and Shares ISA providers are also covered by the Financial Services Compensation Scheme (FSCS). This is a government-backed scheme which protects up to £85,000 of your money in the event that your provider goes out of business.

On top of that, your cash and investments are administered by professional ‘custodians’ and your money is deposited with regulated banks. This keeps your money separate from your provider’s own funds.

As with all investing, though, your capital is at risk. This means the value of your investments can go down as well as up. But, over the long term, stocks and shares have historically risen in value. This is why it’s important to have a long term view when investing for the first time.

When can I open a British ISA?

Not any time soon. The government’s consultation will last until 6th June 2024. After that date, HM Treasury will consider the responses it receives and decide how exactly to implement British ISAs.

Once the Treasury has set the rules, there’s also likely to be a waiting period before ISA providers begin offering British ISAs to investors. 

It’s unlikely that a British ISA will be available until at least 2025

It should also be noted that the British ISA could be scrapped entirely. With a general election to be held no later than January 2025, it’s possible that a new government could drop it or significantly change it – although there is no suggestion that it will at this stage.

What happens next?

For the next 3 months, the government will seek the views of a range of stakeholders on its proposals for a UK ISA. 

These will include investment ISA providers, professional fund managers, retail investors and others with an interest in how a British ISA might work and what its benefits will be.

It’s hoped that the British ISA will increase investment in UK shares. Over the last few years, it’s widely believed that the UK stock market has underperformed that of some other developed countries. Notably the USA.

Return on investment for a range of assets 2013-2022 to compare against a British ISA
The UK’s FTSE100 index has lagged that of the World Index Fund and the US S&P 500

You may have heard investors use the phrase that British shares are “cheap”, implying that they’re underpriced. 

Our view is that they are indeed underpriced and therefore undervalued. The dollar returns you can achieve on certain UK shares are impressive, accounting for exchange rate differences over time. 

Only 4% of UK pension funds are invested in UK shares and this is also something that the government hopes will increase. 

A well-developed pensions market (which the UK has) which invests domestically (which the UK’s currently doesn’t to any significant value) is one of the key drivers of stock market growth.

The UK is not alone in stock market underperformance. Many investment funds all over the world are attracted to the US market, which has almost become a giant hoover of the world’s pension and investment contributions. 

A British ISA, it is hoped, could stop some of this investment going to the US and keep it in the UK.

British ISA – Summary

So, that’s where we are with a British ISA (or UK ISA) at the moment.

It’s a type of Stocks and Shares ISA with its own separate £5,000 annual allowance which is in addition to the current £20,000 annual ISA allowance.

You’ll only be able to invest in UK companies, likely those listed on recognised UK stock exchanges such as the London Stock Exchange (including the Alternative Investment Market).

Rules around holding cash and transferring British ISAs may be bespoke, and different to current ISA rules. This is to ensure the UK ISA is working as planned, with people investing in UK companies and not holding cash or easily transferring out of a British ISA to buy other investments.

But, it’s unlikely to be offered until at least 2025 as we now await a period of consultation and implementation.

When is the British ISA available?

The British ISA is unlikely to be available until at least 2025. The government’s consultation on British ISAs will last until at least summer 2024.

What can a British ISA invest in?

You will only be able to invest in UK companies through a British ISA. Exactly what defines a ‘UK company’ and how this will work is still being considered by the government.

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