Here’s how I’d use the new £5,000 British ISA allowance to buy UK shares

Details about the extra tax-free boon for UK investors remain murky, but I hope these FTSE 100 shares are eligible for the new ‘British ISA’.

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There’s going to be a new ‘British ISA’. This might be the most exciting announcement in Chancellor Jeremy Hunt’s budget for stock market investors.

The government will introduce an extra £5,000 tax-free allowance to invest in “UK-focused assets”, supplementing the existing £20,000 annual contribution limit for Stocks and Shares ISAs.

That’s a 25% boost to how much ISA investors can protect each year! Here’s how I’d take advantage.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Investing in UK stocks

HM Treasury is consulting on the finer details until 6 June so it seems unlikely the British ISA will be available at the start of the coming tax year.

The idea is to “channel more investment into UK equities“. We don’t yet know exactly which “UK-focused” stocks, investment trusts, or Exchange-Traded Funds (ETFs) investors will be able to buy.

Restricting the extra £5k allowance to UK shares won’t be popular with all investors. Many increasingly seek out higher returns overseas, perhaps with good reason.

The S&P 500‘s outperformance over the FTSE 100 index is there for all to see.

But, let’s look on the bright side. Many FTSE 100 shares are cheaper than US stocks. Some have strong growth credentials too.

For me, these Footsie favourites merit serious consideration if they’re available in the British ISA.

A growth-oriented trust

Scottish Mortgage Investment Trust (LSE:SMT) is my first pick. Baillie Gifford’s actively managed fund seeks out growth stocks around the globe.

Whether a London Stock Exchange listing and membership of the FTSE 100 are enough to be considered a “UK-focused” stock remains to be seen.

If so, investors with sufficient risk appetites could consider Scottish Mortgage shares for international diversification. The lion’s share of the trust’s equity positions are in the US. It also invests throughout Europe, Asia, and South America.

Top holdings include Dutch semiconductor stock ASML, red-hot chipmaker Nvidia, and Argentina-based e-commerce giant MercadoLibre.

With unlisted stocks at nearly 30% of the portfolio, volatility‘s a concern. If high interest rates persist, there could be further pain ahead for shareholders since private companies tend to use more leverage.

Nonetheless, the Scottish Mortgage share price trades at a 14% discount to the fund’s net asset value. I expect this gap will close one day. If eligible, the fund would be a long-term buy for my British ISA.

Last year’s FTSE champion

There are bona fide UK-focused growth opportunities too.

A good example is British engineering and defence business Rolls-Royce (LSE:RR.), which has delivered a stunning 874% share price rally since its 2020 pandemic low.

FY23 results show no sign of slowing progress in Rolls-Royce’s turnaround journey.

A 143% rise in operating profit to £1.6bn, significant margin improvements, and a particularly strong recovery for the Civil Aerospace division (which accounts for nearly half the group’s revenue) all indicate the company’s in excellent financial health.

The £2bn in net debt on the balance sheet remains a concern, although this figure’s a big improvement on £3.3bn a year earlier. There are also risks to investing in a firm that’s so reliant on the cyclical aerospace industry.

Nonetheless, buoyed by robust travel demand, elevated geopolitical uncertainty, and ground-breaking small modular reactor (SMR) technology, Rolls-Royce is high on my list of shares to consider for a British ISA.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Charlie Carman has positions in Scottish Mortgage Investment Trust, Nvidia, MercadoLibre, and Rolls-Royce Plc. The Motley Fool UK has recommended ASML, MercadoLibre, Nvidia, and Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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