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.