Small Investments into Shares/ETFs

Chetverka

Hello there,

I’m considering starting to invest in shares, specifically ETFs.  Since I work for an investment bank, I’m limited to using certain brokers. After reviewing the proposed list, I chose Interactive Brokers as they offer the lowest fees.

I opened two accounts with them: a general account and an ISA.  For tax efficiency, I wanted to use an ISA, but fractional shares aren’t permitted in Interactive Brokers’ ISA accounts.

I’m not planning to invest a large amount initially, perhaps starting with £1,000.  My best-case scenario is a £100 annual return.  As I understand it, income from shares below £3,000 per year is tax-free.  Should I mention this on my tax self-assessment?

My strategy is to buy fractional shares through my general account and then transfer them to an ISA once my investment grows.  

Is this a sensible plan?

ColdIron

Chetverka said:I’m not planning to invest a large amount initially, perhaps starting with £1,000.  

Do you need fractional shares? I would have thought £1,000 would be quite enough for whole shares unless you are considering dozens of companies or funds

My best-case scenario is a £100 annual return.  As I understand it, income from shares below £3,000 per year is tax-free.  

No. Income from shares will be dividends or interest which have their own rates and allowances. The £3,000 is for capital gains

Should I mention this on my tax self-assessment?

It depends. Do you currently file a SA?

Chetverka

ColdIron said:

Do you need fractional shares? I would have thought £1,000 would be quite enough for whole shares unless you are considering dozens of companies or funds

This is what I am starting with. As time goes on, I will be investing small amounts, £50 or even £25 when I have them spare.

Should I mention this on my tax self-assessment?

It depends. Do you currently file a SA?

Yes, I do on HMRC request. 

ColdIron

Chetverka said:

Should I mention this on my tax self-assessment?

It depends. Do you currently file a SA?

Yes, I do on HMRC request. 

Then you will need to declare the interest and dividends. You're a long way away from CGT though

eskbanker

Chetverka said:

I’m not planning to invest a large amount initially, perhaps starting with £1,000.  My best-case scenario is a £100 annual return.

In what sense is that a best case scenario?  Investment returns are notoriously volatile, so you might find that in some years you'd be up by 20% or more, and conversely sometimes you'd be down by 20% or more, and anything and everything in between, so don't expect linear progression.

What's your end game, in terms of what you're trying to achieve by investing, i.e. is this just having some fun with a bit of play money or are you actually in it for the long term (having already established enough in liquid savings, etc)?

Rollinghome

Like ColdIron, it's not clear to me why you would want fractional shares, unless you intend to have far too many different holdings.  

ETFs are a way to hold many different types of holdings, including equity index trackers, but there are several other ways including OEICs (a type of unit trusts) for trackers and managed investments and investment trusts for managed investments.  ETFs are likely to be foreign domiciled which can make taxation slightly more complicated. 

HSBC and L&G have a range of OEIC index trackers that will automatically be bought as fractions regardless of the type of account or platform, and can be held as accumulation units or as income units. They can have lower costs than many ETFs depending on the platform used.

I don't know anything about Interactive Brokers but as you work for a bank, I should think someone there and having the same restrictions could advise you. Using the platform that best suits your situation is important.  For very small amounts then you should be looking for free trading or your net returns will be small.  A platform like Hargreaves Lansdown which isn't free but charges a percentage fee is expensive for large portfolios but can be dirt cheap for tiny ones.  Wait for the budget to see whether the taxes on investments will change but they are't likely to affect you.

DRS1

Personally I would contribute cash to the ISA (until it is full) and then buy shares when you have enough to buy a full share (or at least buying without incurring disproportionate dealing costs) - buying shares in the GIA and then bed and ISAing them at least raises the possibility of CGT being applicable.  Of course if you only make a gain of £100 pa then you are well under the £3000 allowance so wouldn't need to put any CGT calculations into your self assessment return.  But if you got any dividends while the shares were in the GIA then those would go in the return.

Chetverka

eskbanker said:

I
What's your end game, in terms of what you're trying to achieve by investing, i.e. is this just having some fun with a bit of play money or are you actually in it for the long term (having already established enough in liquid savings, etc)?

I can't commit to putting a lot of money into this investment; hopefully, £100 per month will be going into. I might get a full share if I am lucky.

eskbanker

Chetverka said:

eskbanker said:

What's your end game, in terms of what you're trying to achieve by investing, i.e. is this just having some fun with a bit of play money or are you actually in it for the long term (having already established enough in liquid savings, etc)?

I can't commit to putting a lot of money into this investment; hopefully, £100 per month will be going into. I might get a full share if I am lucky.

Sure, but that's answering a different question from the one I asked!

Chetverka

Rollinghome said:

Like ColdIron, it's not clear to me why you would want fractional shares, unless you intend to have far too many different holdings.  

ETFs are a way to hold many different types of holdings, including equity index trackers, but there are several other ways including OEICs (a type of unit trusts) for trackers and managed investments and investment trusts for managed investments.  ETFs are likely to be foreign domiciled which can make taxation slightly more complicated. 

HSBC and L&G have a range of OEIC index trackers that will automatically be bought as fractions regardless of the type of account or platform, and can be held as accumulation units or as income units. They can have lower costs than many ETFs depending on the platform used.

I don't know anything about Interactive Brokers but as you work for a bank, I should think someone there and having the same restrictions could advise you. Using the platform that best suits your situation is important.  For very small amounts then you should be looking for free trading or your net returns will be small.  A platform like Hargreaves Lansdown which isn't free but charges a percentage fee is expensive for large portfolios but can be dirt cheap for tiny ones.  Wait for the budget to see whether the taxes on investments will change but they are't likely to affect you.

Thank you @Rollinghome - just checked Hargreaves Lansdown and they charge £11.95 for ETF trade, unless it is placed via direct debit.  
Never heard of OEIC - will have a look. HSBC and L&G  are not on the broker's list, but Hargreaves Lansdown is.

This is what I can choose from:

AJ Bell

Barclays Smart Investor
Fidelity UK
Hargreaves Lansdown
Interactive Brokers
Interactive Investor
Killik & Co
Saxo Capital

They all look to me expensive, apart from Interactive Brokers.

Chetverka

DRS1 said:

Personally I would contribute cash to the ISA (until it is full) and then buy shares when you have enough to buy a full share (or at least buying without incurring disproportionate dealing costs) - buying shares in the GIA and then bed and ISAing them at least raises the possibility of CGT being applicable.  Of course if you only make a gain of £100 pa then you are well under the £3000 allowance so wouldn't need to put any CGT calculations into your self assessment return.  But if you got any dividends while the shares were in the GIA then those would go in the return.

Now I am thinking of going with the ISA Shares account to avoid any potential complications with HMRC.  The Cash ISA currently offers an average return of 4.5%, which, considering the UK inflation rate, isn’t particularly impressive.  

I believe investing in the US economy for ten years could yield around 15% of the average return, which is my rationale for choosing shares.