Guide to Stocks and Shares ISAs

What is an ISA?

ISA stands for Individual Savings Account.

ISAs were launched to UK residents by the Government in 1999. stocks and shares ISAs offer generous tax savings and you can save up to an applicable annual allowance in each tax year and make cash deposits, invest in stocks and shares, or both.

A tax year runs from April 6th one year to April 5th of the following year. There are two types of ISA current known as a Cash ISA and a stocks and shares ISA.

Stocks and Shares ISA allowance.

The annual allowance for a stocks and shares ISA in tax year 2016 to 2017 is 15,240. You can use your full allowance in a stocks and shares ISA or cash ISA or you can split it between a stocks and shares ISA and a cash ISA.

What tax advantages do ISAs have ?

You will not have to pay any Income Tax or CGT - Capital Gains Tax on any growth within your ISA. You also will not need to pay tax on withdrawls of money from the ISA account.

For unit trusts and funds, any income generated will have already been subject to tax as either a dividend distribution or interest distribution.

Dividends on ISA

Dividends earned on shares held in stocks and shares Isas, either directly or in funds were originally tax free, but are now subject to lower rate tax. Consequently, only higher-rate taxpayers can save money on dividends in a stocks & shares ISA.

Must ISA be declared on Tax Return ?

There is no requirement to declare your stocks & shares ISA on your tax return consequently, there is no requirement to indicate any of your ISA holdings or any profits from your ISA on the annual tax return.

Payments into ISA

You will be able to fund your ISA either with a lump sum or by making regular monthly payments. Although rules vary between providers you should be able to set-up payments of at least 50 a month if you prefer to drip feed your funding strategy.

Minimum to open an ISA

With most providers, you must make a single payment of at least 500 to open a stocks & shares ISA and any further payments must be at least 100.

You will have flexablity to change your regular payments whenever you want, as long as you are within your ISA allowance. You can also stop payments at any time.

With some providers, you can also withdraw money from your ISA and pay it back in again without affecting your 15,240 allowance as long as any money you withdraw is paid back in during the same tax year and does not exceed the annual allowance.

Shares ISA Charges

Not all stocks & shares ISA providers apply additional charges to ISA accounts but all providers have cost for dealing in shares - the cost of buying and selling.

Funds like unit trusts are handled differently with costs contained in a buy/sell spreads and an annual management charge although many providers discount the annual management fees. But this is not to be confused with any account quarterly admin charge. [ See below ].

These additional notes will help in considering the cost of an online stocks & shares ISA account.

ISA dealing costs

The actual cost of placing an individual buy/sell order. There is stamp duty also at the prevailing rate but only on buys. Allways check that cheap dealing offers dont have high admin charges.

ISA admin charges

Normally charged quarterly. When calculating real cost look at number of deals likely per year and then add in this admin cost.

ISA shares transfer costs

Check costs to transfer shares, share certificates and other charges must also be considered when evaluating costs. Check account for an ISA schedule of rates.

Online or telephone dealing

Nearly all brokers now offer some form of online dealing with telephone as optional back-up. Some online systems have some human interface and others are 100% automated.

ISA broker support

How much support will the broker offer you ? Will they offer advice and recommendations or is the account an Execution-only ISA, completely without advice.

Broker speciality Information

Some will offer Real-time share prices, trades information, news and feedback direct from the trading floor, live market data.

Execution-only ISAs

Means that stocks and shares ISA is run without advice. Your account is run as a nominee service in which the stock broker service provider holds share certificates on your behalf and administers your online ISA account, making all deductions and advising of any applicable corp actions.

Managed Shares ISAs

It is worth noting that with-advice ISA management is available from discretionary stock brokers. Still run as an online nominee service, admin and other charge structures are significantly higher than a standard execution-only ISA account service but for some investors, a managed funds ISA service can be cost effective especially when tailored to individual needs.

Will I be able to take money out of my ISA ?

You can make withdrawals from a stocks & shares ISA at any time without losing any tax advantages. However, most providers recommend that investments in the stockmarket, through shares, funds or bonds be view as medium to long term and left in place for more than five years.

You should also remember that once you have invested the maximum amount in any tax year, you cannot invest any more, regardless of how much you've withdrawn during that tax year.

What are ISA CAT standards?

CAT stands for: C - reasonable Charges; A - easy Access; T - reasonable Terms. This is the minimum standard the Government set for ISAs, although ISA managers are not obliged to offer an ISA that meets this standard.

The government announced that from 6 April 2005, existing voluntary CAT standards would be discontinued for the marketing and sale of ISA products. Existing CAT standard ISA holders will continue to remain on the same terms and conditions after 6 April 2005 without any changes being made to their ISA account.

Stakeholder ISAs

Were introduced after the demise of the ISA CAT standard, from 6 April 2005. Stakeholder ISA had to meet conditions to ensure that the products are straightforward and good value.

Nowdays the term 'Stakeholder products' covers savings, investment and pensions schemes that comply with minimum terms laid-down by the Government, such as low minimum investments or regular saving amounts and low charges. They no longer specifically apply to stocks and shares ISA although some stakeholder products are still available as stocks and shares ISA depending on the provider.

Combined Cash ISA

Provides an online cash / stocks & shares ISA, allows investment in tax-free interest paying UK or European authorised bank accounts and even National Savings. This is a good choice for short-term savings especially if individuals want to access their money easily. Cash ISA accounts allow individuals as young as 16 years to open an account.

Combined Stocks & Shares ISA

Investors may switch from an online cash ISA account and invest in shares, Unit Trusts, Investment Unit Trusts, bonds and gilts and Life Assurance. It should always be remembered that with a Stocks & Shares ISA there is no guarantee that the return at the end of the term will exceed the original amount invested.

Online ISA Providers

There is considerable variation in ISA products available. Some only offer online stocks and shares ISA. Some providers offer a combined online ISA comprising a stocks and shares ISA with an associated cash ISA account attached. It is important to check availablity directly with providers website.


Directory of ISA Fund Managers

If you are looking for a review of leading fund managers that offer unit trusts, OEIC's or investment trusts that are suitable for an online ISA please see : Directory of Top ISA Fund Managers