A stocks and shares ISA (individual savings account) lets you invest your ISA allowance in stocks, investment trusts, managed funds, corporate bonds and other listed assets with the aim of taking advantage of potential stock market returns. This gives you an easy way to save a regular monthly amount or invest a lump sum. With a stocks and shares ISA, you get to choose how your money is invested.
The stocks and shares ISA, along with the cash ISA, was introduced in April 1999 and since then the amount annually invested in stocks and shares ISAs has grown to over £20bn.
What are the tax benefits?
- You don’t pay Capital Gains tax on profits made within an ISA
- Dividends are tax-free under the ISAs dividends allowance
- You don’t pay Income Tax on interest from corporate bonds held in your ISA
A stocks and shares ISA allows you to invest in a diverse range of listed assets, including shares, corporate bonds, UK Government gilts, investment trusts, cash and other approved assets. With all of the options above an investor can create a diversified portfolio through investing in an ISA.
How do I qualify?
Any UK resident (for tax purposes) over the age of 18 can open a stocks and shares ISA.
Want to open an ISA for your children? You can do that using a junior stocks and shares ISA, which can be set up in the name of a child so parents can create these to save for things such as university fees.
There is a limit on how much can be invested into an ISA in any tax year. This limit has steadily risen since the ISA was introduced in 1999, from £7,000 to the present day limit of £20,000. This amount can be split in any form across a cash ISA and a stocks and shares ISA.
Opening an ISA
Opening a stocks and shares ISA is easy and can normally be done online through your chosen provider. If you have no other account with the provider you might need to provide them with a copy of your ID card (or passport) and proof of your address (a utility bill will normally do).
Points to consider
Many ISA providers will have their own rules around the minimum investment amounts. Some accounts may require a minimum lump sum investment when opening the account, while others might ask for a minimum monthly payment, or both. Read the terms and conditions of the individual ISA provider to ensure you know what you are signing up for.
Charges, fees & costs
ISA providers may charge a range of fees depending on how active or passively managed your account is. There is typically no setup fee, but there will normally be an ongoing management fee of up to 1%. There may also be additional fees depending on the types of investment held in the account as well as for the trades themselves.
While it’s possible to hold many types of asset in your ISA account, not all ISA providers will allow all ISA allowed assets to be held in their accounts. The ISA provider may not deal in certain asset types therefore they are not offered for the ISA account. Take not of which asset types are allowed in the account before signing up.
Take money out
Stocks and shares ISAs tend to be viewed as a longer-term investment than the cash ISA. Unlike flexible cash ISAs, where money taken out during a tax year can be added back in under the ISA wrapper, money withdrawn from a stocks and shares ISA cannot be added back into the account during that tax year, so the tax breaks will no longer apply to the amount removed.
Transfer between accounts
You can transfer your ISA to another provider or ISA type (e.g. from a cash ISA to a stocks and shares ISA) at any time. The only real stipulation is that if you want to transfer the money you’ve paid into your ISA in the current tax year, you must transfer the full amount. For old ISAs, the amount you transfer is up to you.
Before paying into a cash ISA, check the rules around transferrals with your provider and if necessary, seek independent advice.
To transfer between ISA providers, follow these steps:
- Contact the new provider and set up an ISA account with them
- Complete an ISA transfer form, which will ask for details of ISAs you would like to transfer and, where it is a previous year’s ISA, how much of it you would like to transfer
- Decide whether you want to move across all your existing holdings or sell all/part of your holdings first and transfer the cash value
- Wait - your new provider will arrange the transfer on your behalf and it should be completed within 30 working days of your initial request
- Your new provider will notify you when your transfers are completed
The risk factor
As with all investments, the value of a stocks and shares ISA and the income derived from it is liable to go down as well as up, and you may receive less money back than originally invested.
Further, the tax advantages of an ISA may change in the future and may also change depending on your individual circumstances (salary, capital gains etc). Make sure you are aware of all the rules and keep up to date on potential changes to tax regulation.
Funds, unit trusts and OEICs
In effect, these are three types of the same asset: a trust formed to manage a portfolio of stock exchange securities, which small investors can buy into. Prices are set once a day and reflect inflows and changes in value to the underlying investments.
Investment trusts are companies set up to manage and invest a fixed pool of investment. They can borrow to invest, which boosts returns in a rising market, and pay dividends out of reserves. Investors buy or sell their shares in the stock market, incurring dealing charges.
Tracker or index funds
These are investment funds that track an index. Given these are not actively managed, they typically charge far lower management fees.
Exchange traded funds (ETFs)
ETFs are similar to tracker funds, except instead of tracking an index they track a group of shares on the market.
Inc and Acc
These are income units (inc) and accumulation units (acc). Income units distribute any interest or dividend income from the fund to you, while accumulation units reinvest the dividends in more units.
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