The DIY British ISA?

Have you decided how to use your 2023-24 individual savings account allowance yet? Remember, you have until the end of 5 April to use as much of this year’s £20,000 allowance as you feel able; once the new tax year begins on 6 April, you’ll get a new ISA allowance, but anything unused from 2023-24 is gone for good.

However, one thing you can’t do yet is open a British ISA. In this month’s Budget, Chancellor Jeremy Hunt promised investors would soon get an additional £5,000 ISA allowance each year that would have to be used to invest in British stocks. The Treasury is still working out the detail of this plan, so don’t expect to see a proper launch of British ISAs until the 2025-26 tax year at the earliest.

In the meantime, however, the proposal does beg the question of what counts as a British stock. Should it simply mean every company with shares listed on the London Stock Exchange, as the AIC has argued? If so, that would include a significant number of large businesses that earn most of their revenues outside the UK. It would also include, by the way, every London-listed investment trust, no matter where such funds invest their money.

Another approach might seek to limit investors to UK companies that conduct at least a certain proportion of their business here; the threshold might be set with reference to where revenues are earned, say, where staff are employed, or even where tax is paid.

If so, that could mean British ISAs would need to focus mainly on small and medium-sized companies, which tend to be much more domestically focused than their larger counterparts. Investors could be given the option of investing directly in such companies, or via collective funds that hold at least a certain proportion of their assets in these stocks.

Of course, you don’t have to wait for the Chancellor to put his money where his mouth is to explore these investments. You can’t take advantage of the additional £5,000 allowance soon to be on offer, but you can create a version of the British ISA inside this year’s conventional allowance.

Indeed, there is a strong case for considering investment trusts whose portfolios are full of the small and medium-sized companies that may one day be the mainstay of British ISAs. Putting the Chancellor’s motivations to one side – he is simply keen to boost investment into British companies – some of these funds appear to offer particularly good value right now.

That partly reflects the underperformance of small and medium-sized company shares over the past year or so in relation to the blue-chip stocks of the FTSE 100 Index. This part of the market is particularly well placed to benefit from an economic recovery boosted by the interest rate reductions that are now expected to begin as soon as May or June.

Also, shares in investment trusts in this area are currently trading at a significant discount to the value of the fund’s underlying assets – around 13% in the case of the typical smaller companies trust, for example. That has widened in recent weeks but should eventually start to narrow as investor sentiment towards this area of the market improves.

None of which is to promise overnight returns – and smaller company shares in particular come with challenges such as illiquidity and volatility (another reason investment trusts are a good way to invest in them). Still, 2024-25 just might prove to be the year of the British ISA after all, even though no such thing officially exists yet.