7 things investors want to know about the ‘UK ISA’

The government has plans to introduce a brand-new ISA dedicated to British investments.

The ‘UK ISA’ is still in the planning stage but could eventually allow another £5,000 of tax-free investing in qualifying assets - on top of the existing £20,000 ISA allowance. After announcing its introduction at the Spring Budget this week the government has asked industry and others to respond to its plan before the design of UK ISAs is finalised.  

We don’t yet know exactly how it will work or, in truth, whether it will ever see the light of day. Nonetheless, if it happens it will be significant addition to the savings regime and potentially a valuable one for those able to make best use of it. Here’s seven things you need to know about the UK ISA.

Didn’t we already know this?

Well, sort of. As with every financial statement from the government these days, the significant plans leaked - deliberately or not - ahead of time. Reports prior to the Budget suggested an ISA dedicated to British assets was on the way but exactly what was unknown.

A key question was whether the government would insist some of the existing ISA allowance (£20,000 a year for adults) be carved out for UK investments, or if an extra allowance would be granted on top.

As it was the UK ISA will afford investors an additional £5,000 of allowance for UK assets, bringing the total allowance for tax-free savings and investments to £25,000.

When could the UK ISA be available?

The government is running a consultation until June and will put the finishing touches to the UK ISA after that. While yet to be confirmed, it would make sense to schedule the official introduction on the UK ISA for the start of the new tax year in April 2025.

What counts as UK assets?

This is a key question. A consultation paper on the UK ISA asks respondents to suggest the assets they believe should be allowed but suggests as a starting point the approach adopted for ‘Personal Equity Plans’ or ‘PEPs’ - a forerunner of ISAs.

These allowed shares of companies that were incorporated in the UK and listed on UK exchanges. Under that arrangement, there would be no requirement that companies conduct some or all of their trading in the UK. Just being incorporated and listed here would suffice.

Collective investments - including funds which are the entry point for most small investors - could also be allowed. The rules for PEPs allowed funds and investment trusts which invested 75% of their assets in eligible UK companies.

It may not only be shares that can be held in UK ISAs. The consultation paper also specifies corporate bonds and gilts - UK government bonds - as possible inclusions. The notable exception is cash, with the government suggesting cash and cash-like investments will not  be allowed inside UK ISAs.    

What other rules might apply?

The existing ISA rules allow transfers between ISAs and for more than one ISA of a particular type to be opened each year. We don’t yet know whether the same flexibility will be extended to UK ISAs. Industry providers will be key here - they will need to support the UK ISA so there may be practical considerations that mean extra rules apply for UK ISAs.

Who will benefit?

Anyone not already using their £20,000 ISA allowance probably won’t benefit from the UK ISA at all. That means most UK savers and investors. Only when you come up against that £20,000 limit will the UK ISA become useful.

Right now, those individuals can continue to invest outside an ISA but face paying Capital Gains Tax (CGT) on their gains above their annual CGT allowance - £6,000 for 2023/24 lowering to £3,000 in 2024/25. CGT on investments is charged at 10% for basic rate taxpayers and 20% for higher rate and additional rate taxpayers. If introduced, the UK ISA will allow them to shelter another £5,000 a year from tax.

How should you use a UK ISA?

If you have fulfilled your existing ISA allowance and therefore expect to open a UK ISA, it make sense to plan how you might use it.

Taken together, the ISA and UK ISA will provide £25,000 of allowance. Some 20% of that will be exclusively for UK assets. It would make sense to place all your eligible UK assets within the UK ISA, freeing up space in your main ISA for other investments.

Even if you exclude UK assets from your main ISA completely, you could still end up with a high weighting to the UK, especially if you use all of your £5,000 allowance. The UK stock market accounts for around 4% of global stock markets by value, so holding 20% of your money in the UK - as the UK ISA would allow - means your portfolio risks becoming overexposed to the home market.

Anyone planning on using a UK ISA would have to think carefully about how they split their assets.

Will the UK ISA actually happen?

The government sounded confident in announcing the UK ISA but it will have escaped no-one’s attention that a General Election stands between now and a likely launch date.

The opposition Labour party leads in the polls and has already said it will reverse some of the government’s recent changes to the financial system - time will tell whether they intend to reverse this one as well.

Learn more about ISAs

Read more on UK fund ideas from our Select 50

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.