ISAs and Investment Funds
March 18, 2010
3. Stocks and Shares ISAs
A stocks and shares ISA - which you can get through the Motley Fool Share Dealing Service - enables you to invest your money in the stock market, rather than simply saving it.
You can invest up to £11,520 in a stocks and shares ISA for the 2013/14 tax year.
You can put your money into the shares of any company listed on a 'recognised stock exchange', or into pretty much any fund run from the UK. A recognised stock exchange means most major markets, such the London or New York Stock Exchanges.
AIM, the Alternative Investment Market, which is a market for smaller companies here in the UK, is not a recognised stock exchange so, as a general rule, you can't put AIM shares into an ISA. However, a few AIM companies, mostly oil and mining shares, can be put in an ISA because they also have another listing on a recognised stock exchange in, say, Australia or Canada. If you're in any doubt as to whether you can put a particular share in an ISA, it's best to speak to your broker first.
Once your investment is safely sheltered within a share ISA, it will be protected from both income tax and capital gains tax (CGT).
The income tax benefits of share ISAs are less pronounced than for cash ISAs and only higher rate taxpayers benefit.
Outside of an ISA you don't pay any tax on dividends if you are a standard-rate taxpayer so there's no income tax advantage in holding them within an ISA. However, higher rate taxpayers enjoy a tax benefit, as they don't have to pay any additional tax on their dividends, as they would do if the shares were held outside of an ISA.
For example, if a higher-rate taxpayer were to receive £100 of dividends on investments held outside of an ISA, they would have to pay additional tax of £25.
One further issue to think about is that, if you are a basic rate taxpayer now, but suspect you might be a higher rate taxpayer in subsequent years, using an ISA could save you income tax in future, even though you won't get any immediate benefit.
Capital Gains Tax
The main tax benefit that share ISAs offer is protection from Capital Gains Tax (CGT).
If you make a small one-off investment in an ISA then it is unlikely that you will ever save much in the way of CGT, as you are allowed to make a certain amount of capital gains each year before you have to pay anything (the limit is £10,900 for 2013/14). However, especially now the rate of capital gains has increased to 28% for higher earners, using ISAs year after year could help you avoid a substantial CGT bill further down the line.
In the case of funds, there are often no additional charges to pay by sheltering your investments within an ISA, so you are often getting your tax protection at no additional cost. If you are investing in individual shares you may have some additional charges to pay for using an ISA. However, these are often capped and if you can bundle together several years' worth of ISAs together in one account you can usually limit these costs to around £50 per annum.
Note that there is one tax you can't escape, even within an ISA. This is stamp duty, which is payable on all share or fund purchases. It is charged at 0.5%. There is no stamp duty to pay when you sell.
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