Julian Knight: No wonder we can't be bothered with equity ISAs
Sunday 16 March 2008
The weeks prior to deadline day for investing your annual individual savings account (ISA) allowance – which falls on 5 April this year – used to be just about as exciting as it got in the heady world of personal finance. I know, I must get out more.
Back in 1999, at the height of the dot-com boom, investors were buying stocks and shares ISAs right, left and centre. I remember one unit trust firm hiring a helicopter to ferry last-minute ISA applications. ISA investment had caught the imagination of more than your usual money hobbyists.
Friends of mine jumped into ISAs in the months leading up to the crash, egged on by financial advisers. As many of you will know, this situation ended in tears when the "new paradigm" of the dot-com age – basically, the old-fashioned notion that profit and turnover didn't matter – was shown to be codswallop. Even those investors who hung on in there after the crash are still down on the deal, nearly a decade later (so much for the ability of shares to outperform other investments over the long term). In the process, a generation of small investors were turned off ISAs for good.
Now, against a backdrop of credit crunches and talk of impending recession, most unit trust or investment trust fund groups I speak to say that investor interest is practically zero. Most of them barely need a letter opener, never mind a helicopter.
But the lack of excitement surrounding this ISA deadline isn't just the result of painful memories or current market turmoil. There is something more fundamental at play. Put simply, the stocks and shares ISA tax break has become a game, for many, no longer worth the candle. And this is because of government policy, some of which was confirmed in last week's Budget.
It all started in 2004 when the Government turned the same trick that helped undermine workplace pensions by taxing dividends earned on shares held in ISAs. This reduced the growth potential of millions of the accounts. Fortu-nately, whatever growth is to be had from an ISA is still free from capital gains tax (CGT). But from April the rate of CGT will fall from 40 per cent to 18 per cent, in effect reducing the benefits of ISAs.
Throw into the mix the fact that you can make a capital gain of £9,200 in a single tax year before triggering CGT and it's true to say that the tax break only really comes into play when you invest large sums that grow substantially over the long term and are then cashed in almost at once.
Last Wednesday, the Chancellor confirmed that from April the amount that can be paid into stocks and shares ISA each year will rise from £7,000 to £7,200. That's a miserly 3 per cent and is the first increase since ISAs were introduced in 1999. If ISA allowances had kept pace with inflation, they'd be around the £10,000 mark today.
Of course, on balance, it's best to hold unit trusts or investment trusts inside an ISA rather than outside, just in case you have to cash them in at once and you have been fortunate enough to make a substantial capital gain. But the tax breaks as they now stand hardly justify anything approaching excitement.
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