A Stocks and Shares ISA is a tax efficient investment product that allows savers to invest some, or all of their ISA allowance in stocks, managed funds, investment trusts, corporate bonds, and other listed assets. This ISA was created to offer savers an alternative to the cash ISA and to take advantage of potential stock market returns.
Why consider a stocks and shares ISA?
- Investors do not pay capital gains tax (CGT) on profits made within an ISA.
- Dividends are tax-free under the ISAs dividends allowance.
- Investors do not pay income tax on interest from corporate bonds held in their ISA.
There is a limit on how much can be invested into the ISA each 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.
Through their Stocks and Shares ISA, investors can invest in a wide 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 throught investing in an ISA.
The great news about Stocks and Shares ISAs is that anyone who is 18 or older and is a UK resident for tax purposes can open one. Furthermore, a junior stocks and shares ISA can be set up in the name of a child so parents can create these to save for things such as University fees.
Opening an ISA
Opening a stocks and shares ISA is easy and can typically done online through your chosen provider. If you have no other account with the provider you may need to provide them with a copy of your identification card (or passport) and proof of your address – typically done through sharing a copy of a utility bill.
Things to keep in mind when choosing an ISA provider
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, others may require a minimum monthly payment, and some may even require both. Read the Terms & Conditons 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. Typically there is no set up fee but there will be an ongoing management fee (ranging from 0-1%). Additionally there may be fees depending on the types of investment held in the account and for the trades themselves.
Which assets can be held
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.
Taking money out
Investors should keep in mind that the Stocks and Shares ISA is viewed as a longer term investment than the Cash ISA. Unlike flexible cash ISAs, where money that is taken out during a tax year can be added back in under the ISA wrapper, money that is taken out of 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.
Transferring between accounts
HMRC allows investors to transfer money between ISA providers and between types of ISA (i.e. from a Cash ISA to a Stocks and Shares ISA). The main stipulation around transferring of ISA money is that only the full of the amount of an ISA invested in the current year can be transferred to another account whereas, any part of the amount of a previous years ISA account can be transferred to another provider.
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 an in-specie transfer – where your existing holdings are moved across – or whether you are selling all or some of your holdings first and transferring 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 three are the same type of asset, a trust formed to manage a portfolio of stock exchange securities, in 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
Funds that track an index. Given they are not actively managed they typically charge far lower management fees.
Similar to tracker funds except instead of tracking an index they track a group of shares on the market.
Inc and Acc
Income units (inc) in a fund or ETF pay dividends as cash. Accumulating units (Acc) reinvest the dividends in more units.
AMF, TER and OCF
The Annual Management Fee (AMF) is the amount investors pay to the fund manager for running the fund. This is often time expressed as a percentage of the assets being managed. The Total Expense Ratio (TER) and the Ongoing Charges Figure (OFC) include the management chare plus most of the other running costs.
History of the stocks and shares ISA
The Stocks and Shares ISA, along with the Cash ISA, was introduced on the 6th of April 1999 to replace the Personal Equity Plan (PEP) – the Cash ISA replacing Tax-Exempt Special Savings Accounts (TESSAs).
Since 1999 the amount annually invested in stocks and shares ISAs has grown to over £20 Billion.
For further information, please refer to the government website.