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The UK’s first “Isa millionaire” has backed calls for the government to curb tax reliefs on cash Isas to boost consumers’ returns and encourage investment in UK equities.
Lord John Lee of Trafford, whose Isa holdings first reached £1mn in 2003, told the Financial Times that the tax-free allowance on the popular savings product should be capped at half the limit of the stocks-and-shares Isa, a tax wrapper for investment.
Currently, consumers can put up to £20,000 a year into the UK’s Isa products without paying tax on their interest or returns. But financial services companies have lobbied chancellor Rachel Reeves to reduce tax breaks on cash Isas, arguing that the near-£300bn in savings would be put to better use in the UK’s equity markets.
Lee, 82, said the UK needs a “sensible balance” between encouraging equity investment and supporting those who want to keep some of their money in savings.
“The whole purpose of Isas originally was to encourage saving and they have been a huge success,” he said. “We do want to encourage people to save and if they want to save in a cash Isa, then fine. But the tax advantages [should not be] as attractive as [stocks and shares] Isas.”
To ensure that money makes its way to UK stocks, and is not diverted to more popular holdings, such as the US tech giants, Lee says the stocks-and-shares Isa needs to be limited to UK-listed companies.
However, returns for UK-listed equities have paled compared with those on the other side of the Atlantic. In the five years to the end of January, annualised gross returns for the MSCI UK All Cap index were 6.47 per cent. Over the same period, the MSCI USA All Cap index delivered annualised gross returns of 14.75 per cent.
Lee acknowledged that consumers might lose out on bigger gains if his proposals to restrict Isa investment to UK companies were implemented. But he said that tax reliefs on Isas — ultimately paid for by the UK government — were “valuable” and ought to be utilised to “encourage people to invest here”.
People are “free to invest overseas if they want to, but all I’m saying is, why do we give them tax incentives to do that?”
Those who have existing overseas holdings in their Isas would not be required to divest under Lee’s proposals — “that would be retrospectively unfair and administratively very messy,” he said. “But certainly I think future sales should be restricted.”
Short-lived plans for the “British Isa”, devised by the previous Conservative government and announced in their March 2024 Budget, were scrapped by the Labour government in September. The scheme, which would have allowed an extra £5,000 Isa allowance for UK-listed equities only, was dropped over concerns it would “complicate” the investment market for individuals.
Savers have pushed back against proposals to curb or scrap cash Isas, saying they prize the stability and simplicity of the product. An Opinium survey released last month by the Building Societies Association — which has come out against any changes — found that just under three-quarters of cash Isa holders were against scaling back tax incentives on cash Isas.
Specifically, concerns have been raised by people who would be averse to taking on more risk — perhaps if they are preparing to buy their first property. With rising volatility and fears growing over bubbly US stocks, concerns of a downturn have intensified.
But Lee insisted his proposals would not “dramatically affect [people’s] personal circumstances in terms of having money for emergencies or house deposits”. Rather, “it would just be an adjustment” that would “encourage people to take a long-term view” and invest, he said.
But how many people would be encouraged to switch from cash to stocks-and-shares Isas? Most cash Isa users contribute far less annually than the £10,000 limit inferred from Lee’s proposal, according to the latest figures from HM Revenue & Customs.
In the 2021-22 tax year, two-thirds of individuals who put money into cash Isas contributed less than £5,000. One in 10 hit the government’s current £20,000 allowance.
Lee refuted the argument — made by the UK’s largest DIY investment platform, Hargreaves Lansdown — that setting different allowances for saving and investing could overcomplicate the Isa regime and deter consumers from using the products.
“I can’t believe most people won’t be able to understand the simplicity of my approach,” he said.
Last month, retirees told the FT that they avoid the stock market because of their need for money at short notice. Lee said that while he could understand their problem, it was nonetheless “a necessary complication” on the path to getting Britons investing.
“We have to have a much greater investment culture here in the UK,” he said. “Financial education has been abysmal and we should all be worried that more of our young people are [aware of] cryptocurrencies than traditional forms of investment.”
Lee’s own Isa story began in 1987, after then chancellor Nigel Lawson launched the personal equity plan, a precursor to the Isa that allowed people to invest in shares and trusts free of income and capital gains tax. For the next 17 years, he invested the maximum amount allowed and reinvested all the dividends he earned. By 2003, his £126,000 investment in Peps and Isas was worth £1mn. When his granddaughter was born, he even suggested she be named Isa.
She was named Florence.
