Individual Savings Accounts (ISAs) have become a cornerstone of saving and investing for many in the UK, with AJ Bell revealing that UK adults hold nearly £750 billion in ISA wrappers. This wealth is divided into around £456 billion invested within Stocks and Shares ISAs and £285 billion in Cash ISAs.
There’s a limit to how much you can contribute into an adult ISA every year. As of the 2024/25 tax year, this stands at £20,000, although individual limits can apply to certain accounts.
In his 2024 Budget, chancellor Jeremy Hunt proposed a “British ISA” designed to encourage investment in UK-focused assets while still allowing tax-efficient growth.
This new option would include an additional £5,000 allowance, bringing your total potential annual ISA contribution to £25,000.
While this may initially sound enticing, the British ISA could mean that your portfolio isn’t as diversified as it realistically should be, and could contribute towards “home bias”.
Continue reading to discover how the British ISA would work, and how it could encourage home bias.
The proposed “British ISA” is designed to encourage investing in UK-focused assets
As you read above, the British ISA would allow you to invest an extra £5,000 on top of your existing £20,000 limit across most adult ISAs.
Remember, investments within an ISA don’t incur Income Tax, Capital Gains Tax (CGT), or Dividend Tax.
The important caveat is that you would only be able to invest the additional £5,000 in UK-based companies and assets.
While the British ISA could theoretically allow you to shield more of your wealth from taxes and benefit from potential investment growth, the risk of home bias is a considerable concern.
Home bias could be unavoidable with the British ISA
Investing carries some level of risk, but you may be able to manage this by adopting a balanced strategy. A well-diversified portfolio may help to distribute your wealth across several different assets and sectors.
This means that if a particular investment falls in value, you could potentially offset these losses with gains from elsewhere.
Importantly, diversification extends beyond sectors and assets; it may also be wise to invest in companies from different countries.
If you neglect to do this, you might be unknowingly suffering from home bias.
This occurs when you concentrate a large portion of your investments in local assets and companies, which is far more common than you may think.
Indeed, Barclays reveals that the UK stock market makes up around 4% of the global market, yet British investors typically allocate 25% of their portfolio to domestic holdings.
This tendency towards familiarity is somewhat understandable. Your home market may be the one you know best, after all, and solely investing in it could help you feel more in control and give you the perception that it’s “safer”.
However, this approach could actually increase your exposure to risk and reduce potential opportunities for growth.
Even if you invest your £5,000 British ISA allowance in UK funds, and the remaining £20,000 in overseas investments with your regular allowance, 20% of your overall portfolio would still be tied to the UK stock market.
There are many reasons you may benefit from avoiding home bias wherever possible
Focusing solely on the British market could lead you to miss out on potential long-term growth opportunities that may come with broader diversification.
This is because markets around the world often perform differently over the same time period, as demonstrated by the asset quilt below, which showcases the performance of various stock market indices.
Source: JP Morgan
The varying performances across different markets highlight how investing solely in one geographical location could cause you to miss out on growth from others.
While short-term fluctuations aren’t exactly indicative of long-term trends, adopting a diversified approach to investing could ensure that you benefit from particularly profitable surges in markets around the world.
Also, if you only invest in one market, you’re essentially concentrating your risk. The US market is a prime example of this.
Investors’ Chronicle reveals that US assets account for 60% of the FTSE All-World index, but just because the US market is so vast, doesn’t necessarily mean you should concentrate your holdings there.
Furthermore, the performance of the US market is primarily driven by the seven largest technology companies – aptly called the “Magnificent Seven” – with the Guardian revealing that they made up 17.2% of the global stock market in 2023.
If you invest heavily in these companies, and the tech sector experiences a downturn, you could face significant losses.
While this is only one example of many, it does demonstrate the potential downsides of concentrated risk, which occurs when you invest a large portion of your wealth in one particular sector or geographical area.
The same could be true for Britain – which is why, although it’s a tax-efficient investment opportunity, the British ISA may lead to an overexposure to UK-based holdings.
Get in touch
We can help ensure that your portfolio is adequately diversified so you can manage risk, with or without the introduction of a British ISA.
To find out more, please contact us by email at info@investmentsense.co.uk or call 0115 933 8433.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
