isa vs. non-isa for non-taxpayer

Bazn

hey everyone

I am not currently a UK tax payer ( i'm a student; my income is below the starting rate). I receive gross interest on my savings.

I have a stocks and shares ISA with with a high street bank. I have also invested in unit trusts outside of the ISA wrapper (via a funds supermarket).

As it is coming to the start of the new tax year, I was thinking about converting my unit trust holdings into an ISA with the funds supermarket (i'm aware that this would mean that I cant make any contributions to my High street ISA during that year)

This transfer carries a 0.25% charge and also mean I'll be out of the market for a few days and subject to any bid-offer spread.


I understand that I can get tax vouchers to claim back tax on the income from unit trusts. And with the amounts I have invested, it is almost impossible for the income to reach anwhere near the tax threshold.


So my question is, given my circumstances, is it worth transferring into an ISA wrapper? For the next three years, I am not going to earning enough to pay tax, so what (if any) are the benefits of ISAs vs direct unit trusts?

I'd appreciate your views...

david78

Hi Bazn,

I'm not aware you can get "tax vouchers" for income distributions on funds you hold outside of an ISA. Are you sure?

You need to look at the long term. You have your unit trusts because you want them to grow and possibly give you a good income. If you are holding these for 5 or 10 years from now (or others you have switched into), you will be a tax payer by then. I think you should take the 0.25% hit on encashing your units and buy them back in an ISA supermarket wrapper. This is only £17.50 on a £7000 portfolio if that's what you have got. Another thing, is that you will switch your unit trusts anyway at some point in time because they won't be the best funds to be in.

Don't forget to get the best discounts when you buy back your funds or new funds.

dunstonh

(i'm aware that this would mean that I cant make any contributions to my High street ISA during that year)

Only if you use a MAXI.

This transfer carries a 0.25% charge and also mean I'll be out of the market for a few days and subject to any bid-offer spread.

Not necessarily. That would depend on the provider you use.

I understand that I can get tax vouchers to claim back tax on the income from unit trusts. And with the amounts I have invested, it is almost impossible for the income to reach anwhere near the tax threshold.

You havent been able to claim the tax back on unit trusts since 1999. Only a few unit trust funds have an exemption to this (gilts and corporate bonds).

So my question is, given my circumstances, is it worth transferring into an ISA wrapper? For the next three years, I am not going to earning enough to pay tax, so what (if any) are the benefits of ISAs vs direct unit trusts?

If you get the right ISA and its not going to cost you anything, then yes. If you are going to pick a provider that charges you, then no.

An ISA is a use it or lose it allowance. If you were talking longer term, then there could be benefits as you never know what the future holds. Everyone has plans but life has a habit of changing those.

ReportInvestor

I advise maxing your Cash ISAs as we don't know it the £3K annual allowance will fall back to £1K in 2010. This could be a valuable tax free allowance that you could keep for life & might be denied your contemporaries who invest after 2010.

Do this first, as the benefits of share ISAs v direct investments in unit trusts are limited at your income level.

Bazn

thanks guys for the tips... uv convince me to transfer into an ISA in the new tax year.... especially as i thought of one more thing...

by the time i start paying tax, i'l have more than 7k in unit trusts so I wont be able to transfer it all straight away. so its a smart move to use each year's Isa allowance cumulatively until then.

as for (low rate) tax on dividends, this cannot be reclaimed even in an ISA. However, some of the unit trusts have a fixed-interest component - surely tax can be reclaimed on this?

david78

If you are transfering into a series of mini stocks and share ISAs then you can have a mini cash ISA each year as well if you want and can afford it. You only have 4 years of ISA investing left (5 if you include the year ending 5/4/06.)

I think the interest on fixed interest investments is free of tax in an ISA.