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Stocks and shares ISAs: everything you need to know

ISAs shelter investments from tax

A stocks and shares ISA protects your investments from tax on growth and income. If you are serious about investing then one of the best ways to boost your wealth in the UK is to build your portfolio inside an ISA.

ISAs are tax-efficient ‘wrappers’ created by the UK government to encourage saving. Any investment inside the ISA wrapper can grow tax-free as long as you don’t break the rules.

Stocks and shares ISAs are provided by high street banks, fund managers such as Vanguard, financial advisors, and specialist online brokers or platforms.

You get a new ISA allowance every tax year. You can put the entire amount into a stocks and shares ISA if you wish.

£20,000 is the maximum amount of new money you can pay into a stocks and shares ISA during the tax year 2020-21. The tax year runs from 6 April to 5 April.

The ISA deadline is 5 April every year. That’s the last day of the current tax year you can use up your allowance. You get a new allowance from 6 April but you can’t roll over unused ISA capacity from the previous year.

If you’ve left things late then it’s enough to have the cash taken off your debit card and inside your ISA by close of business on 5 April. You don’t need to have actually invested the cash for it to qualify for tax-free protection.

Why open a stocks and shares ISA?

A stocks and shares ISA combines three critical features:

  • The ability to invest in assets that are expected to grow faster than cash.
  • Legally recognised tax protection means you don’t have to worry about HMRC handing you a large bill because you invested in some sketchy offshore caper.
  • Instant accessibility – you can invest in liquid holdings that can be sold to meet unforeseen difficulties or other life events that occur before you reach pension age.

In short, ISAs are a private investor’s top tax-protection shield, along with pensions.

Which taxes are not paid in a stocks and shares ISA?

The main taxes that you do not have to pay on investments in a stocks and shares ISA are:

  • Income tax on interest – as earned on bonds and bond funds.
  • Dividend income tax – as paid by shares, equity funds, and property funds.
  • Capital gains tax on profits – as paid on the growth in value of taxable assets when you sell them.
  • Inheritance tax – sometimes, although it’s complicated, and depends on the ISA passing to a spouse or civil partner who’s not been estranged from the deceased.
  • Interest and dividends paid straight out of your ISA are not taxed.
  • Withdrawals aren’t taxed unlike with a pension. (Although you will pay a penalty if you withdraw from a Lifetime ISA at the wrong time).

Investing in a stocks and shares ISA is a no-brainer, even if you think your holdings are too small to be caught up in the taxman’s net.

  • Many providers charge you no more for holding an ISA than they do for keeping your assets in a taxable account.
  • Though most of us start out small, your investments can grow surprisingly rapidly over the years and outstrip your ability to manage everything within your tax allowances.
  • Taxes can go up in the future and the government has heavily trailed that likelihood given our mountainous national debt. Wealth taxes are an obvious target. Use your tax shelters while you can.
  • You don’t even have to tell HMRC about your ISA transactions (and believe me, if you ever have to fill in a tedious capital gains tax form, you’ll fall to your knees with thanks that all your investments are in an ISA.)

If you’re on a mission to achieve financial independence before your minimum pension age1 then stocks and shares ISAs will accelerate you towards your goal.

The best course for most will be to combine ISAs and SIPPs to achieve the FI dream by using ISAs to bridge the gap between your FIRE date and minimum pension age.

The minimum pension age for accessing your personal pension is currently 55 but the government has confirmed it will rise to age 57 at some point in 2028. Thereafter the minimum pension age is due to be set ten years before your State Pension age.

A stocks and shares ISA is also a great place to stash your pension’s 25% tax-free lump sum so that you can expand the amount of income you can take without being pushed into a higher tax bracket.

Investment ISA types

You can hold investments in the following types of ISA:

  • Stocks and shares ISA
  • Lifetime ISA (choose a stocks and shares version not cash)
  • Junior ISA (choose a stocks and shares version not cash)

ISA providers call stocks and shares ISAs by various names including:

  • Shares ISA
  • Self-Select ISA
  • Ready Made ISA
  • Share Dealing ISA
  • Investment ISA
  • Workplace ISA
  • AIM ISA

They’re all stocks and shares ISAs that have been given different marketing labels depending on how the provider is trying to appeal to consumers.

A stocks and shares ISA may also be a flexible ISA. This means you can replenish withdrawals without running down your ISA allowance.

You can invest in a stocks and shares ISA from age 18 onwards by opening an account with your chosen platform (bank, fund manager, IFA or similar).

We’ve put together a list of providers in our cheapest online broker table. These providers enable you to invest in a DIY stocks and shares ISA. You can see who offers a flexible stocks and shares ISA in the left-hand column.

Stocks and shares ISA rules

You can have as many stocks and shares ISAs as you like, so long as you don’t put new money into more than one per tax year.

You can split money across a stocks and shares ISA, lifetime ISA, cash ISA, and innovative finance ISA, provided you don’t put in more than £20,000 between them,2 nor open more than one of each type, in the same tax year.

You can transfer money from previous years’ ISAs (of any type) into multiple stocks and shares ISAs with any provider. And vice versa.

Transferring old ISA money or assets does not:

  • Use up your ISA allowance for the current tax year
  • Break the one-type-of-ISA-a-tax-year rule

You can transfer any amount of your previous years’ ISA’s value. You can transfer the whole lot into one ISA, or transfer a portion of it into several ISAs, or any other combo you desire.

You must transfer the whole balance if you’re transferring your current tax year’s stocks and shares ISA

You can transfer it into a different type of ISA – provided you haven’t already opened one of that type this tax year. In that instance, you can also open a new stocks and shares ISA later that tax year. This is an exception to the one-type-of-ISA-a-tax-year rule.

Always transfer an ISA to retain the tax-free status of its assets. Don’t withdraw cash and plop it in a new ISA – doing so uses up your ISA allowance!

Transfer assets in specie (this avoids them being sold to cash) if you are given the option. In specie moves are also known as re-registration.

You can’t invest new money in a workplace ISA and a stocks and shares ISA.

You can invest £9,000 per tax year in a JISA for each of your children. This doesn’t reduce your own ISA allowance.

Most stocks and shares ISAs have minimum required contributions. They are often as low as £50.

Replacing cash withdrawn from a flexible stocks and shares ISA does not use up your ISA allowance. However you can’t replace the value of shares, or other investment types, that you moved out of the account.

It’s worth checking your ISA’s T&Cs whenever you choose a product. Not all of the government’s ISA rules are mandatory and ISA managers do not have to support all features.

Best ISA funds

The main investment vehicles that you can include in a stocks and shares ISA are:

  • Mutual funds such as OEICs and Unit Trusts
  • Exchange Trade Products such as ETFs and ETCs
  • Investment trusts
  • Individual company shares
  • Individual government and corporate bonds

The government maintains a comprehensive list of the complete menagerie.

If you are new to investing then our passive investing HQ can explain more.

Remember that all of these assets above are riskier than cash – you can get back less than you put in.

See here to help gauge how much risk you might be able to handle as you build your investing portfolio.

Index trackers are an investment vehicle that combine simplicity and affordability and are recommended by some of the best investors in the world. Here’s a list of some particularly useful index trackers.

The Financial Services Compensation Scheme (FSCS) provides some investor compensation should your ISA or investment manager go belly up. Do take a look at the link – the scheme is convoluted to say the least.

Stocks and shares ISA costs

You can expect to pay stocks and shares ISA investment fees that cover:

  • Your ISA provider’s management costs
  • The cost of owning investment funds
  • Dealing fees for trading investments in the open market
  • Fees for special events such as transferring your ISA

All fees should be transparently laid out by your ISA provider and investment fund managers.

Charges that can be paid from monies held outside of your ISA, if your provider agrees, include:

  • ISA provider’s management costs
  • Fees for special / one-off events, such as closing your account

Charges that must be paid from funds held within the ISA include:

  • Dealing fees
  • The cost of owning investment funds

A flexible ISA doesn’t enable you to replace the cost of ISA charges against your allowance.

Beware of transfer fees that can rack up when your provider charges you ‘per line of stock’. For example, they might charge you £15 per company stock and investment fund that you own.

Tax efficiency

You can’t transfer most unsheltered assets straight out of a taxable account and into your stocks and shares ISA wrapper.

You generally have to sell the assets first and buy them again inside your ISA. This is colloquially, if not popularly, known as Bed and ISA.

Selling an unsheltered investment can cost you capital gains tax on your profits but you can duck that by staying within your capital gains tax allowance and defusing your capital gains.

You can transfer employee share save scheme shares directly into an ISA in some circumstances.

If you want to invest more than you can squeeze into your annual ISA allowance, then research tax efficient investing to avoid building up a capital gains tax time bomb.

Inheriting a stocks and shares ISA

Check that the T&Cs of your stocks and shares ISA allow for it to remain tax-free and invested after your death.

The main wrinkle that applies specifically to stocks and shares ISAs is that you can only receive assets in specie by transferring them to the same provider as your spouse or civil partner held them with. You can transfer the assets to another manager once they are held in your name.

The other clause is that assets transferred in specie must be the ones held on the date you were told of the death of the investor. (Some might see this rule as pretty heartless. However I don’t know about you but the very first thing I want to know after hearing the news of my partner’s death is the list of non-cash assets they’ve got tucked in their ISAs. Let’s cut to the chase!3)

In specie transfer must be made within 180 days of the assets passing into the beneficial ownership of the surviving spouse / civil partner.

Some wealth managers and platforms market AIM ISAs that twin the advantages of a stocks and shares ISA’s tax efficiency with the inheritance tax-elusiveness of Alternative Investment Market (AIM) shares.

Some but not all AIM shares qualify for inheritance tax relief under peculiar government rules that are subject to change. An AIM ISA is:

  • Risky
  • Not guaranteed to work out
  • Subject to high minimum investments, which add a naughty elite frisson to the escapade

The links are there if you need ‘em.

Stocks and shares ISAs aren’t just for the rich

Many people think ISAs are a rich person’s concern, since very few have experience of paying capital gains tax, or even income tax on share dividends. But modest savings can really add up to a big portfolio in a bull market, at which point the tax protection is invaluable.

Shielding your investment returns from tax like this can make a huge difference to your end result from investing.

Take it steady,

The Accumulator

  1. The moment you can first crack open your personal pension. []
  2. Or more than £4,000 in the case of the lifetime ISA. []
  3. Sarcasm. []
{ 16 comments… add one }
  • 1 DavidD November 10, 2008, 9:42 pm

    I’m glad you have started posting again, your posts are both interseting and insightful.

    David

  • 2 The Investor November 11, 2008, 5:21 pm

    @David — Thanks very much for noticing, and for the kind words! I’ve got to admit that it’s a lot more work keeping up a blog than I expected, and the past few months has had plenty to keep us all busy! But I do hope to post a bit more frequently from now on.

  • 3 DavidD November 11, 2008, 9:01 pm

    I know what its like!

    I’m glad to hear that. I bet you are loving the look of some of the high yield shares at the moment, as I am too.

    Here is a random question…have you ever heard of Money Week magazine? Its a great read, sad as it is, its one of the things I’m missing about the UK at the moment.

  • 4 The Investor November 12, 2008, 4:57 pm

    @David – Ah Moneyweek, the home of the fragrant Merryn Somerset Webb. She might have been just as wrong as me about a recovery in Japan, but I have to admit her uber-bearishness on just about everything else has been right on the money so far (though I think she was a bit over-bullish on commodities if I remember correctly). And she’s a fellow traveler when it comes to house prices, which have only partly corrected against the long-term price-to-earnings ratios…

    Anyway, predicting this stuff is mighty hard. At least it makes a nice change to see a woman doing it.

  • 5 DavidD November 13, 2008, 6:40 pm

    haha your talents are wasted in whatever job you do, unless of course you are a writer! You have a great style.

    I think you are right about her predictions on Japan, and commodities. It’s hard though, everything has gone down, even the investments which historically have been negatively correlated.

    Japan does look cheap, especially the smaller companies. I think I might seriously transfer all my pension to a nice Japanese Index Fund or 2.

    What are you doing with your money at the moment, if you don’t mind me asking?

    I am coming up with a nice shortlist of dividends shares. I feel like a kid in a candy store!

  • 6 stock picking July 16, 2010, 8:14 am

    This is article is especially true given the recent changes in Capital Gains Tax. Need to shield as much of your wealth as you can these days.
    .-= stock picking on: Stock Picking =-.

  • 7 Sundar September 8, 2020, 2:25 pm

    With respect to ISA transfer, is it possible to transfer just a part of your existing ISA account to a newly opened ISA as a “past-year contribution” transfer ?

  • 8 Amit September 8, 2020, 7:13 pm

    “ assets transferred in specie must be the ones held on the date you were told of the death of the investor”

    Is it heartless or instead a moot point to prevent a partner from subsequently topping up the deceased’s ISA and then seek a transfer ie double dip into that years allowance. This may also happen inadvertently if regular contributions and investments from the deceased’s account haven’t been put to stop in a timely manner.

  • 9 miner_49er September 8, 2020, 8:05 pm

    Any idea on the duration it takes to do a transfer from Vanguard to iWeb? and whether they do in specie?

  • 10 The Accumulator September 9, 2020, 8:06 am

    @ Sundar – the answer to that is yes.

  • 11 William September 9, 2020, 3:44 pm

    @miner_49er
    May I enquire why you wish to transfer from Vanguard to iWeb? I believe Vanguard only transfer in/transfer out as cash.

  • 12 DBF September 9, 2020, 4:25 pm

    It’s always refreshing to be reminded that when tax ‘shielding’ schemes are designed by the 12-year-old-looking bods in HM Treasury they are fine, but when accountants and individuals find their own ways of mitigating their tax bills (legitimately and legally) it’s labelled ‘avoidance’.

    Which HMRC now expects you to fess up to in your tax return – so they can either come after you, or give their policy wonks another loophole to close to keep them out of trouble!…

  • 13 W September 10, 2020, 6:47 am
  • 14 Berserker September 13, 2020, 10:19 am

    about to step in this area.
    one benefit i think there is for me is the fact that my work pension with Aegon will combine cost of all assets including stocks and shares isa when they work out how much to charge me.
    Also still guessing what the hell i invest in at this time 🙂

  • 15 Sian February 4, 2021, 4:32 pm

    Thanks for the info, completely new to investing so please forgive my questions if they seem simple. I’m looking to long-term invest with a stocks and Shares ISA and this is the first time I’m opening an account.

    If I open a S&S ISA before April 6th will I then need to reopen another one after this date if I wanted to continue saving in this way or can I keep adding to the original one? If I have to open a new ISA in the new tax year, can you ever add to the old one with ‘new money’ or is that done for that tax year?

  • 16 The Accumulator February 4, 2021, 7:08 pm

    Hi Sian, you can keep investing in the same ISA every tax year. The dawn of the new tax year gives you a fresh £20,000 that can be funnelled straight into your ‘old’ ISA.

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