There is chatter that the Government is open to reforming ISAs, the savings accounts which shelter capital gains and income from the taxman. The chancellor’s Autumn Statement on 22 November might shed light on how they might evolve. Ahead of that event, here is what Shares believes might, or might not, happen.

One of the key goals for reforming ISAs would be to encourage more people to save and invest for their future. To achieve such a goal, the Government needs to streamline the ISA range and have less complicated rules.

There are six types of ISA in existence – Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, Lifetime ISA, Junior ISA and Help to Buy ISA. The latter is closed to new money, but that still means savers and investors need to get their head round which of the other ISAs they should use.

Currently you can put up to £20,000 across all types of ISA, while the Lifetime ISA and Junior ISA have individual limits at a lower level. One of the suggestions is the Government could let you have an additional ISA allowance specifically for investing in UK stocks.

The Government is keen to provide a boost to the economy and there are suggestions that providing an incentive to back UK businesses is one way to help. In theory, this could also benefit the London Stock Exchange as it could drive more interest in the UK market.

Is it a goer? We do not think so. The average subscription to a Stocks and Shares ISA in 2021/22 was £8,690 according to HMRC. In reality, only wealthy individuals can afford to max out their full £20,000 annual allowance. There would be no incentive for the average investor to put more money into UK stocks if they still had an unused ISA allowance under current levels.

There is also the matter that a large chunk of UK-listed companies generate their earnings overseas and are not a straightforward play on the UK economy.

A better way to encourage more investment in UK stocks would
be to remove stamp duty on Main Market shares, in line
with AIM stocks.

Merging the Cash ISA and Stocks and Shares ISA would also be a smart move. Do not expect such a change to be ready for the new tax year though as financial services companies would need to consider launching new products or changing their systems to support the merged ISA type.

Meanwhile, someone using a Lifetime ISA to help buy their first home cannot acquire a property worth more than £450,000 under HMRC rules. That might be too low for parts of the country – for example, Rightmove says flats in London sold for an average of £565,147 last year. Might it be better to raise the maximum property price under the Lifetime ISA each year? We do not expect any imminent change to the 25% Lifetime ISA exit penalty.

Elsewhere, the Innovative Finance ISA has dwindled in popularity and we would not be surprised if the wrapper closed to new money.

We are heading toward an election year so chancellor Jeremy Hunt will be looking to secure votes. That means finding quick wins, which is not the right approach. ISA reform needs proper consultation with the industry and time to decide the best approach for investors’ long-term needs.

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