We explain how you can take advantage of this tax-free investment allowance.
Rather than being a specific type of investment or account, a stocks and shares ISA is a tax wrapper that allows you to invest up to £10,680 (less any amount saved in a cash ISA) this tax year, tax free.
(The ISA limit increased from £10,200, £5,100 cash, to a total tax free savings allowance of £10,680, £5,340 of which can be saved as cash for the 2011/2012 tax year).
In April 2008 any funds previously held as a Mini Stocks and Shares ISA or as the stocks and shares component of a Maxi ISA were reclassified as a Stocks and Shares ISA.
What are the advantages?
The main benefit of using your tax free ISA allowance to invest in stocks and shares is that any investment protected by this tax wrapper is free from income tax and capital gains tax.
To put this into perspective, basic rate tax payers would usually pay 20% income tax on any profit made on their investments and higher rate tax payers would usually pay income tax at a rate of 40% or 50%. For higher rate tax payers, the amount of tax you will need to pay on dividend income is also reduced.
What’s more, should you make more than £10,100 from the sale of ordinary investments during a tax year you will be required to pay capital gains tax on the profit. However, investments held within a stocks and shares ISA wrapper are exempt from this.
Where can I invest?
Within your ISA wrapper you have the option to invest in individual shares, bonds or pooled investments such as investment trusts, open-ended investment funds or life assurance investments.
The type of ISA investment you decide on will largely depend on your attitude to risk and whether you would prefer to control your investment yourself or enlist the help of an expert (such as a fund manager who will choose and manage your investments for you).
How much can I invest?
Every tax year (running from 6th April one year to 5th April the following year) you can invest up to £10,200 in a stocks and shares ISA, less any amount that you’ve invested in a cash ISA (up to the £5,100 maximum).
Any money you hold within an ISA wrapper retains its tax-free status indefinitely. However, you are unable to carry over any unused allowance from one tax year to the next so if you don’t invest the full £10,200 by the 5th April, you lose the opportunity.
Who can invest in a stocks and shares ISA?
To be eligible for the tax relief provided by a stocks and shares ISA you will need to be over the age of 18 (cash ISAs are available to those over the age of 16) and a UK resident. Crown employees working overseas (such as diplomats or members of the armed forces) can also take advantage of this tax-free allowance as can their husbands, wives or civil partners.
Can I invest in more than one stocks and shares ISA?
You are only allowed to invest in one stocks and shares ISA, with one provider each tax year. However, if you wish to do so, you can invest in both a cash ISA (up to the £5,34 maximum) and a stocks and shares ISA (to the £10,680 maximum less any amount invested as cash) and these can either be with the same, or with different providers.
Can I transfer my stocks and shares ISA?
There are several different rules that apply to the transfer of stocks and shares ISAs and they are as follows:
- You can transfer any funds you have saved in a cash ISA during the current tax year to a stocks and shares ISA. However, you will need to transfer the whole amount contributed.
- You can transfer any funds you have saved in a cash ISA during a previous tax year to a stocks and shares ISA and this will not be counted towards your current year’s £10,680 allowance.
- You are not able to transfer money held in a stocks and shares ISA to a cash ISA.
- You can transfer your stocks and shares ISA to a different stocks and shares ISA with another provider.
Remember that for your funds to keep their tax free status they will need to be transferred directly between your old and your new ISA provider. You must never simply withdraw the funds and use them to open a new stocks and shares ISA yourself as they will immediately lose their tax free status.
What do I need to be aware of?
How long?
Stocks and shares ISAs are most suited to individuals who are looking for a long term investment opportunity. In fact, it’s often recommended that you should be willing to leave your funds untouched for a period of at least 5 years.
How much?
Some ISA-eligible investment vehicles will require you to contribute a minimum opening amount and/or a regular monthly sum to your investment so affordability is something you will need to consider.
Any charges?
Many stocks and shares ISA providers will levy a number of charges and you will need to take these into consideration when deciding which provides the right investment opportunity for you. The most common charges to be aware of include an annual fee, an initial or opening fee and an exit fee. Self-select ISA providers may also levy a fee per transaction.
Any guarantees?
As with any investment, the capital you hold within a stocks and shares ISA is unlikely to be guaranteed (as with a cash based account). This means that while your investment may grow over time, there is a chance that it could also decline in value. While there are various means of moderating the risk to your capital it is because of this that any investment you make in a stocks and shares ISA should be considered a long-term venture.
