How does a stocks and shares ISA work?

ducklet_2

This maybe a silly question but i'd appreciate it if someone could help!

If I invested money in a stocks and shares ISA and the shares went up and i made a profit would this be within the tax free wrapper?(What if i'd used up my tax free alowance or would the proceeds still be tax free?)

Aegis

The allowance is only used when adding cash to the ISA wrapper. After that, what goes on in the ISA stays in the ISA.

CLAPTON

If you invest in an S&S ISA and the value of the shares increases and you then sell them or not and withdraw the cash or not , then it is totally tax free.

In addition you still have your CGT allowance 9,600 currently for other capital gains.

Bear in mind that S&S ISA usually make charges that may outweigh the tax gains.

earlgrey_3

ducklet wrote: »

If I invested money in a stocks and shares ISA and the shares went up and i made a profit would this be within the tax free wrapper?

Yes. But you wouldn't pay tax on your gains outside of an ISA until you exceeded your capital gains allowance either - currently £9600 pa. All dividends come tax paid for basic rate tax payers and that tax can't be reclaimed within an ISA.

The_Fiddler_2

earlgrey wrote: »

Yes. But you wouldn't pay tax on your gains outside of an ISA until you exceeded your capital gains allowance either - currently £9600 pa. All dividends come tax paid for basic rate tax payers and that tax can't be reclaimed within an ISA.

So for a basic rate tax payer it makes no difference if you buy stocks and shares outside an ISA as long as you don't sell anymore than a gain of £9600 per year (or whatever the CGT is)

earlgrey_3

The_Fiddler wrote: »

So for a basic rate tax payer it makes no difference if you buy stocks and shares outside an ISA as long as you don't sell anymore than a gain of £9600 per year (or whatever the CGT is)

Also, you can't set your loses in an ISA against your gains.

You'd normally have to pay an additional management fee for individual shares in an ISA but that's usually covered by the standard fees with collective funds. An additional hazard is there's a deterrent to getting out of a shares ISA when markets start to fall because the allowance is lost. So they won't be worthwhile for a lot of people despite all the encouragement from the industry.

dunstonh

Fixed interest funds can claim back the tax within a stocks and shares ISA. So, there is a benefit there. Obviously higher rate taxpayers benefit as do those that use their CGT allowances. Another group who can benefit are the over 65s as income within an ISA doesnt go towards the age allowance reduction limit.

Plus you have cumulative effect and administration benefits of an ISA. Outside of an ISA you need to record dates and costs to keep an eye on CGT. Inside the ISA it doesnt matter. For funds (rather than shares) there is no cost difference holding them in an ISA compared to not so it should be ISA first (when funds are used).

earlgrey_3

I'd agree with most of that D but S&S ISAs can be a pain in the butt too. Things like rights issues, returns of cash to shareholders by companies etc., all tend to be more complicated and incur extra costs when restricted by an ISA.

A big problem too is if an investor wants to move into cash in falling markets such as we've recently seen. Cash within a stocks and shares ISA will usually earn a lousy rate of interest, often round just 2% or so. Under the rules, cash can only be held within an ISA for a limited time and even the poor rates of interest are then hit with what amounts to a tax charge on top (even though it isn't called a tax). The inflexibility caused by ISAs can be expensive if there's no tax gain.

There's further inflexibility caused by the limits on what can be paid in so most investors will want to hold investments both inside and outside of an ISA which means then there are two or more separate accounts to run.

dunstonh wrote: »

For funds (rather than shares) there is no cost difference holding them in an ISA compared to not

I don't think that's quite correct. There's only no extra charge if the ISA manager considers the annual commission he gets paid by the fund manager is already sufficient to cover the costs. There can be an extra charge for funds with very low fund management charges such as some tracker funds and ETFs which pay intermediaries little or no annual commission just as there normally is on shares. (I believe one broker has just dropped admin fees on shares ISAs subject to conditions but there's no knowing how long that will last and there are fairly hefty fees to exit.)

A minority of people would gain from an S&S ISA but the majority would probably not - whereas all income tax payers benefit from cash ISAs. Despite that, the prospect of avoiding tax, whether a reality or not, is widely used as a sales tool by financial advisors and salesmen who can earn commission selling S&S ISAs that they wouldn't earn on cash ISAs.

Frege

As a higher rate tax payer would I be right in saying I just pay dividend income at the basic rate in a S&S ISA?

dunstonh

I don't think that's quite correct. There's only no extra charge if the ISA manager considers the annual commission he gets paid by the fund manager is already sufficient to cover the costs. There can be an extra charge for funds with very low fund management charges such as some tracker funds and ETFs which pay intermediaries little or no annual commission just as there normally is on shares. (I believe one broker has just dropped admin fees on shares ISAs subject to conditions but there's no knowing how long that will last and there are fairly hefty fees to exit.)

That is possibly the case on some DIY providers (although I am surprised that it is the case) but with the fund supermarkets IFAs use there is no additional charges. It doesnt matter if its low commission payers like fixed interest funds, property funds or trackers or some of the no commission payers.

Despite that, the prospect of avoiding tax, whether a reality or not, is widely used as a sales tool by financial advisors and salesmen who can earn commission selling S&S ISAs that they wouldn't earn on cash ISAs.

As there is no cost difference the failure to use an ISA would be an upheld complaint waiting to happen. Also, you ignore the long term benefit. I have many clients with over £100k in ISAs. If they were not in an ISA they would have capital gains tax to worry about.

debbie42

Frege wrote: »

As a higher rate tax payer would I be right in saying I just pay dividend income at the basic rate in a S&S ISA?

My understanding is that the dividends are paid with the tax credit, the same as outside an ISA. You don't pay any more though, which you'd have to outside of the ISA.

One thing that hasn't been covered yet in this thread is that holding shares within an ISA means you don't have to declare them on you tax form. That is a BIG incentive to me to have them there, for the £25 annual fee I pay.