In the run-up to the Autumn Statement, Chancellor of the Exchequer Jeremy Hunt has indicated a desire to widen the scope of individual savings accounts (ISAs). Inevitably, this has led to a great deal of speculation and rumour as to exactly what he might attempt or achieve.

There are currently four types of ISA:

  • cash ISAs
  • stocks and shares ISAs
  • innovative finance ISAs, which include peer-to-peer loans and crowdfunding debentures
  • lifetime ISAs (limited to cash and stocks and shares), theoretically designed to enable 18–40-year-olds to get on the housing ladder or act as a quasi-pension.

Individuals can save up to £20,000 in one type of account or split the allowance across some or all of the other types.

Additionally, Junior ISAs covering cash and stocks and shares with a £9,000 limit are available for under 18s but have not made it into the current conversation.

There is a limit of only £4,000 for lifetime ISAs, which benefit from a 25% government-funded uplift, but are highly restrictive. Unless investors are willing to accept a 25% penalty, money can only be withdrawn and used for the purchase of a first home worth up to £450,000 or else after age 60.

The big attraction of ISAs comes in the form of tax breaks. Holders of accounts do not pay tax on:

  • interest on cash in an ISA
  • income or capital gains from investments in an ISA.

The most obvious change would be to lift the £20,000 annual limit. While an increase might look generous, in reality it would be costly to the Exchequer and impact a limited number of people and each of those, by definition, would at the very least be relatively wealthy.

Therefore, other changes are being mooted, generally with the goal of increasing the proportion of ISA investments that are held in stocks and shares rather than cash. This would echo attempts by (most commonly Conservative) prime ministers and Chancellors in the last century, who were keen advocates of wide private share ownership.

One suggestion that could prove attractive to Mr Hunt is the abolition of the current requirements for separate cash and share ISAs. This would remove an administrative barrier and allow instant transfers between categories within a single account. Such a change could be a double-edged sword, since while it might theoretically increase the amount invested in stocks and shares, the opposite could as easily be the result.

Another idea would be to introduce ring-fenced ISAs holding nothing but investments in UK companies. This could obviously be refined to limit investment to quoted companies, smaller companies or any other designation. Whether investments in such funds would add to the £20,000 annual ISA limit or be permitted on top, say adding an extra £10,000, will be a decision for the Chancellor.

There has been a recent controversy regarding the permissibility of including fractional shareholdings in ISA accounts. HMRC has ruled that the legislation excludes such holdings but that interpretation is currently subject to a prospective challenge in the courts. A change in legislation to clarify the position might be welcome. Realistically, this is unlikely to have a material impact on more than a handful of investors.

As explained above, the rules regarding lifetime ISAs often make them impractical so one positive measure could be a relaxation of some of the limits or even a more drastic rethink.

Looking at the quasi-pension route, few 18-year-olds are excited by the prospect of a fund that they could only cash in in the mid-2060s unless they are willing to suffer a 25% tax charge on any amount withdrawn.

Finally, innovative finance ISAs have not proved popular and media rumours (leaks) hint that these may be withdrawn.

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