why put funds in ISA ?

happyhero

Hi I have some funds in Hargreaves Lansdown some within a Fund and Share account and some within an ISA, but I'm trying to look up the exact advantages of putting the funds into the ISA can anybody advise me please?

The only reason I can see is that you can avoid Capital Gains Tax, but as that is £11,000 this year it seems to me you would have to have a fair bit invested to hit that. I suppose someone with £100,000 may make over 11% and hit that but I would guess the majority wont manage a profit of £11,000 in a year.

I have ended up each year not transferring the non-ISA funds into an ISA in case I want to use my ISA allowance for anything else during the year but then I find I get near April and I start to think that since I have not used my ISA allowance for anything this year I maybe should use it by transferring the non-ISA funds into an ISA but as I wont hit the Capital Gains allowance I wonder why do it, can anybody advise me with this please, whats best and why?

TheTracker

Essentially you're right. You don't reap the real benefit until you avoid hitting the CGT allowance. But you need to prepare for it over the years as if you wait until you hit 100k it may be too late. You should also give thought to whether it's best to put highly volatile funds in the NISA rather than a pension To avoid the tax on the way out of a pension.

Archi_Bald

The only possible downsides to an S&S ISA, compared with an unwrapped investment, I can see are

1. the annual limit
2. potentially a small annual charge, depending on the provider
3. no protection from means-tested benefits (as you would get for a pension)

I'd love the annual limit to be higher but in reality, none of these bother me. Other than the above there are only upsides - no need to keep any records for HMRC purposes, no need to declare your investments on tax returns, no need to ever worry about CGT (unless some suicidal government decides to change the law).

enthusiasticsaver

As well as not having to worry about capital gains if you are holding interest bearing bonds in a stocks and shares isa, the interest on that is tax free and if you are a higher rate taxpayer the dividend income tax is capped at 10%. No benefit for a basic rate taxpayer though.



I have to say that I started investing outside an isa this month as I had already used up my full allowance in a cash isa for 2014/15 and was going to transfer it in April to a stocks and shares isa but not sure if I will bother as I cannot see an advantage to that.

Gadfium

Don't forget that the ISA provides tax sheltering for as long as the fund is in the wrapper. As I understand it you could invest up to £15k per year and that is then sheltered for ever (unless the rules are changed, of course). So even if the fund grew to £1M in the future, the growth is free of CGT and income tax.

lisyloo

I believe higher rate tax payers save paying dividend tax.

happyhero

TheTracker wrote: »

Essentially you're right. You don't reap the real benefit until you avoid hitting the CGT allowance. But you need to prepare for it over the years as if you wait until you hit 100k it may be too late. You should also give thought to whether it's best to put highly volatile funds in the NISA rather than a pension To avoid the tax on the way out of a pension.

Hi thanks for your post, I'm interested in what you said at the end, can you elaborate on what you mean, I understand that I would pay tax taking income as a pension but you get a 20% boost going in which can be grown to be more.

talexuser

Why?.... for the l-o-n-g term.

I've maxed out my fund isas, reinvested, most years since the early 90s. There are a handful of people who are isa capital millionaires. How about all those dividends, when you need them, tax free, let alone CGT? If you have taken care of all other aspects, pension, reserve cash fund etc, it's a no brainer surely? At some stage, when the tax lost is big enough, the government will surely put a limit on contributions, and it would be difficult to do this retrospectively without a mass protest.

TheTracker

happyhero wrote: »

Hi thanks for your post, I'm interested in what you said at the end, can you elaborate on what you mean, I understand that I would pay tax taking income as a pension but you get a 20% boost going in which can be grown to be more.

I'm not talking about how much you put in and relief at source you get. I'm talking about which funds in which vehicle. If you are spreading retirement funds across an ISA and a PP then what you'd really want is for the growth to be in the ISA more than the PP to reduce tax from dividends and capital growth as well as to make it available on demand. But to do so means appreciating the risk that it may actually go down the most. Personal circumstances change the balance, particularly around when you want to start drawing down the ISA and if you need to live on it during early retirement.

gkerr4

i think its good practice, to use an ISA - the in year benefits for someone starting out aren't obvious - but as stated, it remains tax free for ever while in the wrapper. so many years on as your investments take shape and grow, you may well be thankful it was in there.

Linton

If you have investments outside an ISA (or Pension) you should keep records of each transaction to answer possible future HMRC queries. With an ISA you dont. So even if you dont get any immediate tax benefits using an ISA means less hassle at no extra cost.