Stocks and Shares ISAs

A Stocks and Shares ISA could see you maximise your investments by protecting them in a tax-free wrapper. Find out more...

A Stocks and Shares Individual Savings Account (ISA) acts as a tax-free wrapper for stock market and other sorts of investments.

It has many advantages - especially for higher-and additional-rate tax payers - but it’s also a complex product that involves an element of risk, meaning that the value of your investment can go down as well as up.

Each year you have an ISA allowance, which is an amount you can put into tax-free savings and investments.

That amount resets every new tax year and, if you haven't used it, you lose it. The tax year runs from 6 April to 5 April the following year.

Your ISA allowance can be split in any combination between Cash ISAs, Stocks and Shares ISAs and Innovative Finance ISAs (for peer-to-peer investments) - you can open one account of each type in every tax year.

Stocks and shares should be seen as a medium-to-long-term investment option and, before committing, you may want to think about whether you already have an emergency savings fund to hand.

Remember that past performance is not an indication of what will happen in the future, but the BBC reported ^† that in the 2013-14 tax year the average return for investors in Stocks and Shares ISAs was 9.42% as opposed to 1.69% for Cash ISA savers (the rate of inflation was 1.6%).

Key facts about Stocks and Shares ISAs

Eligibility

To open a Stocks and Shares ISA you must be a UK resident (or a Crown employee serving overseas, or the spouse of one) and be aged 18 or over.

When you open your Stocks and Shares ISA you’ll need to provide a form of ID, such as a passport or driving licence, along with your National Insurance number.

You can only open one with one provider each tax year, although you can have different Stocks and Shares ISAs with different providers in different years. Essentially this means that you can’t split your annual allowance between different providers.

Stocks and Shares ISA allowance

The ISA allowance for 2017-18 is £20,000.

This can be in any combination of cash, stocks and shares and/or peer-to-peer investments, and funds can also be transferred from one type of product to the other.

Payment of tax

If you sell an investment within a Stocks and Shares ISA, you don't have to pay any capital gains tax on any profits you may have made.

Higher-rate taxpayers will also pay a lower rate of income tax on dividends within an ISA. However, there's no benefit for basic rate taxpayers when it comes to dividends.

Risk profile

Due to the wide choice of investment options the risk profile of a Stocks and Shares ISA can vary from very low to very high, and everything in between.

The type of product that's right for you will depend on your personal circumstances, what you want to achieve from the investment and your overall attitude to risk.

Withdrawals

Under current rules, if you withdraw money from a Stocks and Shares ISA during the year you cannot re-invest at a later date with the intention of topping the balance up.

This is because you can only invest up to the ISA allowance for that tax year, regardless of how many withdrawals you make.

Income received

When you receive income from your investment it will be treated in the same way as a withdrawal.

This means that, if you want to increase your capital investment, you may wish to consider an income re-investment option which automatically adds your income to your capital.

How to choose a Stocks and Shares ISA provider

Choosing a Stocks and Shares ISA is a two-step process - first you have to choose the provider, then the investment (often called a 'fund', although this may not be the appropriate term for all investments).

Arguably the most convenient way to select a provider is to purchase through their website, which is commonly known as a 'platform' - read more about investment supermarkets and online investment management services.

Costs and charges

Note that both the platform and the fund will have charges associated with them.

The cost of a Stocks and Shares ISA depends on where you buy it and what you choose to invest in it. Most products have initial and annual management charges.

The former generally range from 0.5-5.5% and the latter from 0.5-2%. The charges are typically intended to cover administration costs and to pay fund managers.

Keeping costs low can be crucial to maximising the efficiency of your investment over time.

Also look out for transfer-out fees.

Types of Stocks and Shares ISA investments

A variety of non-cash assets can be invested in a Stocks and Shares ISA, including:

Shares

Individual shares and corporate bonds issued by companies officially listed on a (global) recognised stock exchange.

Bonds and gilts

With bonds and gilts your money is essentially lent to the government or a company, for which you will hope to receive a return.

Funds

These are one of the most popular types of ISA investment and can include shares and/or bonds, while some will include cash.

Funds are typically based around a theme and the theme can be almost anything - geography, company size, industry sector, type of investment, etc.

The elements of risk and reward will fluctuate enormously depending on the type of fund that you choose.

Peer-to-peer investments

Since 6 April, 2016, it has been possible to place peer-to-peer investments within the tax-free shelter of an Innovative Finance ISA.

Self-select ISAs

As well as choosing the type of Stocks and Shares ISA you want to invest in, you'll also have to choose between a 'self-select ISA' and 'collective investments'.

A self-select ISA will give you full control over your investments, allowing you to choose which shares you invest in.

Usually a self-select ISA will be managed by a stockbroker on your behalf. The element of risk can be high if your investment lies with just a handful of companies.

This product is typically seen as being suitable for experienced investors.

Collective investment ISAs

Collective investment funds may be a less daunting proposition than self-select products for first-time or inexperienced investors.

With this type of investment your money is pooled with that of other investors and placed in a wide range of shares that match specific criteria.

The advantage is that, should some companies in the portfolio make a loss, there are others who may make a profit, thereby limiting the risk.

Collective investments fall into four main categories:

Tracker funds

Tracker funds invest in all the companies in any given index (eg the FTSE 100 or 250) according to their market weightings.

They take out the need for fund managers, meaning that you should expect management fees to be significantly lower - something that can have an enormous impact on the long-term value of your investments.

Many tracker funds also outperform actively managed funds, although all options will differ.

Equity income funds

With this type of investment, fund managers use your money to invest in companies that they consider will offer consistently high returns.

This will typically mean investing in firms that are regarded as large, stable and profitable.

Fund of Funds

Rather than investing in shares, Fund of Fund (FOF) managers invest in other types of funds on your behalf by utilising the expertise of other fund managers.

On the plus side, you are less reliant on one asset and are able to minimise your risk; on the downside, this type of investment can be costly.

Balanced managed funds

In principle, balanced managed funds are similar to FOF investments, but with a restricted maximum equity exposure of 85%.

The main benefit is that the amount of money you can lose is limited as the remaining 15% is held back, but on the downside it also places a cap on the amount of money you can make.

How do I switch a Stocks and Shares ISA?

You can transfer a Stocks and Shares ISA to another ISA (including a Cash ISA) at any time, subject to your provider's terms and conditions.

However, you must transfer the funds and not close your account with the intention of opening a new one. Any funds that are withdrawn will lose their tax-free status.

Your new ISA manager can arrange a transfer for you but, depending on the terms and conditions of your current product, you may be required to pay a charge or sell any existing investments and transfer the cash equivalent instead.

When you transfer remember that:

• The current year’s ISA balance must be transferred whole and cannot be split between providers
• Any previous years’ ISA balances can be split between different providers, subject to the terms of the accounts in question

Should I pay in a lump sum or make regular payments?

As with most questions around investments, there is no guaranteed answer to this question, but it's generally felt that drip-feeding in money through regular payments minimises risk.

If you pay in a lump sum it's possible that the market will shoot up and you'll immediately make a significant gain - but the reverse is equally true.

Making regular payments may help to smooth out the volatile nature of the market.

Inheriting Stocks and Shares ISAs

The Stocks and Shares ISA is subject to the same inheritance tax treatment as other ISAs meaning that, on the death of the account holder, the funds will form part of the estate for inheritance tax purposes.

A spouse or civil partner can inherit ISA tax advantages and is able to invest as much into their own ISA as their spouse used to have, on top of their usual allowance.

Do I need independent financial advice?

Due to the nature of Stocks and Shares ISAs and the element of risk involved, you may wish to seek independent financial advice before investing, particularly if you're a first-time or inexperienced investor.

Independent Financial Advisers (IFAs) are authorised by the Financial Conduct Authority (FCA) and may specialise in these types of investments; as such they can help you to maximise your returns without exceeding the level of risk you're comfortable with.

Remember: With these sort of products, the value of your investments and the income from them can go down as well as up. You may not get back the full amount you've invested. If you’re in any doubt you should consult an appropriate financial adviser.

By Sean Davies