Stocks and Shares ISAs are the backbone of many investment portfolios. The tax-efficient features of a Stocks and Shares ISA, also known as an Investment ISA, mean any profits generated are free from capital gains and income tax. With market volatility as high as it is, and the potential for growth stocks to post stellar returns, it can pay off to use ISAs and avoid the risk of paying Capital Gains Tax (CGT) on any returns in excess of £12,300 per annum.
What is a Stocks and Shares ISA?
Imagine you have £50,000 to invest in the equity markets. After opening a trading account at a broker and turning your investment decisions into trading positions, the market moves in your favour and your portfolio increases in value to £70,000. If you had just bought those positions outright, then selling them and posting a £20,000 gain would see £7,700 of that profit liable to capital gains tax.
If you had gone through exactly the same process and opened a Stocks and Shares ISA account, then all of the £20,000 would be yours to keep. ISAs don’t make any difference to how and when you buy and sell – the market prices that apply to your portfolio are exactly the same. It’s just that the Investment ISA account ‘wrapper’ means you can take advantage of tax breaks.
The key takeaways relating to ISAs are:
- The ISA scheme is completely legit. It is supported by UK governments who want to incentivise the population to invest for their futures.
- The program is only open to UK citizens, but you can invest in non-UK assets. Any stock or share such as Apple Inc (AAPL) can be held in an Investment ISA as long as it is traded on a ‘recognised stock exchange’, in Apple’s case, the Nasdaq.
- UK adults can each invest up to £20,000 per year in an Investment ISA.
- You can pay money into your ISA using everyday payment processing agents and it’s also possible to set up direct debit schemes to support regular saving.
- You can withdraw funds from an ISA at any time, but unless your ISA is a ‘Flexible’ one, you can’t then put the money back in if you have already used your ISA subscription tax allowance for that year.
- If you move abroad, then depending on your destination, you might lose the right to continue investing new funds into your ISA. You won’t, however, be a forced seller and can keep it open for as long as you want.
- The average adult Investment ISA holds £9,331 and the total size of the Stocks and Shares ISA market is £22.6bn.
- That £22.6bn number is constantly changing. As the prices of the underlying assets change, so does the value of the holdings in an ISA. The ISA is only a tax-efficient vehicle with which to hold stocks and shares. Fundamental market-risk principles still apply.
- In a recent survey by Fineco, it is estimated that two out of three people are looking to switch their ISA provider this year. Another trend is that 53% of those asked expect to invest more in their ISA this year than they did in 2020–21. Competition between the brokers is hotting up, and there are some great deals on offer.
What types of Stock and Shares ISA are There?
Stocks and Shares ISAs are a great way to invest but choosing what goes in them is still the fundamental factor in play. Getting that part of the process right involves establishing your investment goals, investment time horizon and risk appetite. Then it’s a case of choosing one of the following types of investment strategies.
Individual Stock ISAs
As with non-ISA trading, you can use your broker or online platform to buy individual stocks and shares, or even just one. The only restriction is the £20,000 per annum cap on subscriptions. You have complete control over trading activity and the privilege and responsibility for making the right calls.
Tracker Fund ISAs
Broker platforms have made diversifying risk easy by offering ISA holders the opportunity to buy a fund that contains a basket of assets. These can be filtered in various ways, including geography (FTSE 100 Fund) or sector (Solar Power Companies). By investing in a fund, you mitigate single-stock risk, but at the same time, only have to make one transaction.
Tracker funds are passive, they simply try to replicate the performance of a benchmark index.
Managed Fund ISAs
It’s also possible to invest in a managed fund for a fee. In this instance, a fund manager will trade in and out of positions to try to use their skills and experience to enhance returns.
How to Invest in a Stocks and Shares ISA
You will need to find a platform, or provider that offers access to stocks and shares ISAs. Whichever provider you choose, the process of setting up a stocks and shares ISA is pretty much the same.
First, you sign up for an account. This process is typically done online and takes minutes to do. The onboarding process involves setting up a user-profile and, as ISAs are a tax-break, the broker will have processes in place to check that you don’t extend your total investment over the £20,000 per year allowance.
Once the necessarily approval is complete, you will then need to go ahead and fund your account. Once your account is set up, it’s simply a case of wiring funds from your bank account into your broker account. This can be done using a variety of payment methods with wire transfer and debit card being popular options.
With a freshly funded ISA account, you then need to find your chosen market. Online platforms allow you to search and filter the different instruments so that you can fine-tune your search. Each instrument will be backed up by some key information reports covering the T&Cs involved with investing in them. There will also be price charts and performance tables to allow you to run some last-minute checks on your investment strategy.
Once all the decision making is done, you can make a ‘buy order’. This process will differ slightly depending on what asset group you are investing in. The ultimate result is that you’ll convert some of your cash pile into financial market assets, which will then fluctuate in value according to market price moves.
Other Ways to Trade in Stocks Tax Free
ISAs are one of the most convenient ways of trading tax-free, but there are others.
Spread betting, also offered by brokers including IG, is tax free for UK and Northern Ireland citizens. It works on the same principles as CFD trading but there is a more limited range of markets available.
CFD trading is subject to Capital Gains Tax, but trading UK shares in CFD form is exempt from Stamp Duty (SDRT), the 0.5% levy on UK share purchases.
In terms of Capital Gains Tax, it’s also worth remembering that each UK individual has an annual CGT allowance of £12,300, so if you don’t post realised profits in excess of that number, CGT will not apply.
The tax treatment of these products is considered in more detail here and does change over time. It also depends on your individual circumstances. If you are uncertain about the tax treatment of the product you want to trade, you should contact HMRC or seek independent tax advice.
Conclusion
Stocks and shares ISAs are long term investments and because of that, some forward planning is recommended. If you’re in any doubt about the suitability of a stocks & shares ISA, you should seek independent financial advice. The process of accessing the markets and finding a reliable and cost-effective broker is more straightforward.
In terms of market prices, you might find you pick one of the best-performing stocks and shares ISAs, but nothing can be guaranteed, and the value of your assets can go down as well as up. But if they do go up, then holding them in a Stocks and Shares ISA means you stand to keep more of the gains.
YOUR CAPITAL IS AT RISK
