Will increasing ISA allowances boost investment into UK businesses?

Ahead of the Chancellor’s autumn statement on 22 November, savers could do with an increased allowance, but attempts to use this to boost investment in UK companies will fall flat.

Increasing the ISA allowance is a good idea as it has been static since the 2017/18 Tax Year. As Dividend Tax and Capital Gains Tax allowances continue to shrink, an augmented annual allowance would offer a much-needed tax break for individuals.

However, it is very questionable whether increasing the allowance could be used to boost investment in UK companies, as the Chancellor may intend. With 65% of ISA funds in cash and current elevated savings rates, many may favour cash ISAs over stock market volatility.

Furthermore, global institutional investors have reduced UK allocations in recent years, citing limited growth compared to overseas markets. Increasing ISA allowances in a bid to boost investment flows into UK companies is very unlikely to alter this sentiment.

Shaking up the ISA system – what could change?

With the likely announcement for greater flexibility when choosing an ISA manager, the ability to diversify funds across multiple ISA providers in the same tax year will certainly help increase competitiveness with Cash ISA rates and provide the holder greater control. Presently the whole ISA needs to be transferred if an investor wishes to seek improved returns.

The possible inclusion of Long-Term Asset Funds will certainly provide investors access to a much wider spread of asset classes such as private companies and real estate as well as infrastructure projects. These being areas that traditionally attract more experienced investors. This will help to provide much needed additional investment for the UK economy and bring fresh capital into important new projects.

Rumours of Fractional shares being included as an investment vehicle within ISA will see HMRC reverse their stance as they have recently warned fractional shares are not covered by Isa regulations. This follows several platforms having launched in recent years to appeal to younger and more tech-savvy investors. Fractional shares give investors the opportunity to invest in big-named companies often US based that come with individual share prices that are out of reach for many individuals, trading at hundreds or even thousands of pounds per share.

Will the Chancellor abolish Inheritance Tax and what does it mean for ISAs?

The Prime Minister's rumoured pledge to abolish Inheritance Tax (IHT) could have dire implications for ISAs containing alternative investment markets (AIM)-listed shares.

Older clients with a lower appetite for risk have been attracted into transferring their often-significant ISA holdings into the AIM market. It is now 10 years since George Osbourne allowed AIM investments to be held in ISAs. Investments in certain AIM shares held within an ISA can mitigate IHT due to business relief (BR) rules. This has attracted investors into the more volatile junior market, with the reprieve of a 40% tax break.

If IHT was scrapped there would be a significant run on the value of these funds held in ISAs which would hurt many older savers.

The UK's budget deficit and the Chancellor's stance against tax cuts make IHT abolition unlikely in the Autumn Statement. However, it may surface in the Spring as part of the Conservative manifesto, impacting AIM shares held in ISAs.

For more insights on potential measures from the Chancellor in his Autumn Statement, view our full Wishlist article.