Make the most of stocks and shares Isas this yearWhich? explains the rules on investment Isas
27 February 2013
The end of the tax year brings a flurry of advertising from Isa providers, many offering the higher risk stocks and shares variety. For those happy to forego the security of cash deposits, and take more risk in search of superior returns, these offer a huge range of tax-efficient investment options.
Here we explain the rules and how you can invest before the end of the tax year and in the next.
What are stocks and shares Isas?
Like cash Isas, stocks and shares Isas are accounts with certain tax advantages. While cash Isas offer tax-free interest, their higher risk counterparts are investment accounts in which you can profit from shares and other assets without losing a slice of any capital gain or income to HMRC.
An important distinction is between the stocks and shares Isa itself - nothing more than a tax-efficient wrapper - and the specific investments you might choose to buy in it, which might include unit trusts and OEICs, investment trusts, shares or government and corporate bonds.
What are the pros and cons of stocks and shares Isas?
With interest rates on cash Isas still hovering around all-time lows, and inflation a growing concern, stocks and shares Isas offer the possibility of a better return, if you're happy to take some risk.
Unlike in a standard investment account, where profits could land you with a capital gains tax bill, and dividends from shares or interest from bonds are subject to income tax, within an Isa wrapper there is no tax to pay (although, if investing in shares, 10% is still taken from dividends at source).
The downside is that, unlike cash Isas, you have no guarantees. If your investments don't perform, or if markets go down, you could lose money.
How much can I invest in a stocks and shares Isa?
Your overall Isa allowance for the current tax year, which runs until 5 April, is £11,280. You can put up to half of this, £5,640, in a cash Isa, with the other half in a stocks and shares Isa. Alternatively, you could opt to put your entire allowance in stocks and shares, or any amount between £5,640 and £11,280, with the remainder in cash. You can't put more than £5,640 in a cash Isa in this tax year.
For the next tax year, your overall allowance will go up to £11,520, up to £5,760 of which will be eligible for a cash Isa.
Can I switch from one stocks and shares Isa provider another?
It's possible to switch from one stocks and shares Isa provider to another and there are two main ways to do it.
The first is through a cash transfer. This means that your current stocks and shares Isa provider sells the investments you own, and transfers the proceeds from this sale to your new provider, and then you must reinvest the money that you have back into the investments you originally held (if you want to keep them).
Cash transfers are the quickest route to switching your stocks and shares Isa, taking around two weeks. But you will spend time with money out of the market and could miss out on some potential growth.
The second way is through a stock transfer, sometimes known as an in-specie transfer or re-registration. With this, you don't sell your existing investments - they are transferred from your old provider to your new provider. This may come with some fees to transfer out, and could take up to six weeks, but you will at least remain invested in the market.
You can switch from a cash Isa into a stocks and shares Isa, but cannot switch from a stocks and shares Isa to a cash Isa.
Which stocks and shares Isa provider should I use?
Stocks and shares Isas are offered by a diverse range of providers, including high street banks, fund supermarkets and stockbrokers. The banks usually offer a small selection of their own funds, which often come with high fees, so they are best avoided.
Look for a provider that offers a wide selection of investment options at low cost. If in doubt, a good financial adviser can help.