Once you have
your portfolio in place, you can put your shares
in an Individual Savings Account, known as an
ISA. This is a government-backed tax-efficient
wrapper for your shares and/or other investments.
All ISAs must be held in nominee accounts.
The ISA was introduced on 6 April 1999 to replace
the PEP and TESSA, and is guaranteed to run until
April 2009. To open an ISA, you need to be 18
or over, and normally resident in the UK for tax
purposes.
You do not pay capital gains tax on your ISA,
but cannot uses losses to offset against gains
elsewhere. You will pay no tax on the interest
or dividends of your savings within the ISA, but
you will pay charges. If you are a basic rate
taxpayer you are unlikely to benefit from a stocks
and shares ISA, but you will gain from a cash
ISA. No minimum holding period or subscription
level applies.
There are two types of ISA: maxi ISAs, which must
be managed by the same investment company, and
mini ISAs, whose components may be managed by
different investment companies. Every new tax
year, you can have either one or the other.
In any tax year, you may invest up to £7,000
in total, as well as any capital sum from a matured
TESSA into a TOISA. In a maxi ISA, you can invest
up to the maximum £7,000 (and use a spouse’s
£7,000 entitlement). Of this you can put
anything up to the full amount in stocks and shares,
including collective investment schemes and gilt-edged
stocks. You can include up to £3,000 in
cash provided that you keep to the overall £7,000
limit. A possible combination would be £4,000
in stocks and shares and £3,000 in cash.
In practice, most investors in a maxi ISA prefer
to invest entirely in the stocks and shares element.
You can invest up to £4,000 in stocks and
shares in a mini ISA, again including collective
investment schemes and gilts, and up to £3,000
in cash. In both types of ISA, it had been possible
to invest £1,000 in insurance, but this
was scrapped in April 2005, and the extra £1,000
has been added to the amount that may be invested
in the stocks and shares element, as given in
the figures above.
The ISA provider cannot reclaim the one-ninth
tax credit available on dividend income to prevent
double taxation, and so this is effectively wasted.
But interest on the funds of corporate bonds is
received gross, which is an argument in favour
of having this type of bond in your stocks and
shares ISA. You will pay no capital gains tax
on investments sold from within an ISA, but cannot
use losses to offset gains elsewhere.
You can use an ISA to assist in the repayment
of a mortgage. You can transfer your ISA directly
between two managers, although you may be charged
by the new manager.
