Stocks And Shares ISA vs Normal Fund Investment

Joey122

Can anyone explain what the benefit of having a stocks and shares ISA is?

If i m not mistaken you only pay tax on anything over 9K in profits so even if you had 50K in an isa and had an incredibly good year earning 20% you would nt pay anything in CGT.

What am I missing?

dunstonh

£7k per year. So, it wouldnt take too long for you to build up a portfolio that could be close to the CGT limits. Plus, some funds can claim back the 10% tax (fixed interest funds for example).

Joey122

Thanks for the reply - Whats 7K a year ? The isa allowance?

I m saying that I dont understand the benefit of having this allowance in that for the majority of investors the return would be equal if you within a ISA or not.

Do you agree ? I accept your point about fixed rate interest refunds, but we are talking about stock isas, so I m not including Bonds in this umbrella

Aegis

Joey122 wrote: »

Thanks for the reply - Whats 7K a year ? The isa allowance?

I m saying that I dont understand the benefit of having this allowance in that for the majority of investors the return would be equal if you within a ISA or not.

Do you agree ? I accept your point about fixed rate interest refunds, but we are talking about stock isas, so I m not including Bonds in this umbrella

There's no further tax liability on dividends either. A higher rate taxpayer has no worries about any of those he or she gets paid.

dunstonh

I accept your point about fixed rate interest refunds, but we are talking about stock isas, so I m not including Bonds in this umbrella

They have to be included though as many people utilise them. Especially the cautious investors or those in retirement.

Its not just Capital gains tax and higher rate tax. There is also age allowance protection as well. Income from ISAs does not go towards your income and therefore it cannot potentially reduce your age allowance.

Whats 7K a year ? The isa allowance?

Yep. 10 years down the line you have £70,000 in an ISA. With growth you are probably through the £100k mark. You can make fund switches to your hearts content without fear of triggering a chargeable event for CGT.

jamesd

Joey122, bonds are one of the perfect things to hold in a stocks and shares ISA because it makes the income from them tax free. Talking about corporate or government bonds, not fixed term bank savings accounts, that are also often called bonds. This makes the stocks and shares ISA a great tool for those retiring and getting a lump sum payment which they want to deliver income.

If you have a long term plan to invest it's good to have the ease of switching without CGT worries and the need to rack all of the buying and selling and capital gains in case you get a year where they are high enough to be taxable.

It's pretty easy: you lose nothing and gain reduced hassle and tax benefits.

cloud_dog

Not sure the OP's original Q has been fully answered.

Joey122 wrote: »

Can anyone explain what the benefit of having a stocks and shares ISA is?

The only benefit of holding investments in a S&S ISA is for capital gains tax reasons, or for income tax reasons if you are a higher rate tax payer. All dividend and interest income received within a S&S ISA is taxed at 20%.

Joey122 wrote: »

If i m not mistaken you only pay tax on anything over 9K in profits so even if you had 50K in an isa and had an incredibly good year earning 20% you would nt pay anything in CGT.

What am I missing?

Sort of. Your CGT liability is an annual limit and is calculated against profits (as you say) realised in the tax year. You can make as much paper profit as you like but the CGT charge comes when you realise the profit (turn it in to cash).

So selling an investment will 'realise' the gain or loss within a specific tax year. You can also offset realised losses against your CGT limit, i.e. make £11k profit on one investment and a £2k loss on another (in same tax year), net affect £9k profit and no CGT to pay.

I invested for many years outside of an ISA before transferring monies in to S&S ISA. The one thing people comment on is that your ISA limit is a use it or lose it thing so if you dont contribute in to an (S&S) ISA you lose your tax free allowance.

cloud_dog

Aegis

cloud_dog wrote: »

Not sure the OP's original Q has been fully answered.

The only benefit of holding investments in a S&S ISA is for capital gains tax reasons, or for income tax reasons if you are a higher rate tax payer. All dividend and interest income received within a S&S ISA is taxed at 20%.

10%. Higher rate taxpayers would then have an additional 22% or so to pay on top of that (works out as 25% of the remainder, I believe)

Just thought I'd highlight that, as it is a huge saving if you're ever likely to get into the higher tax bracket.

Brum_Man

cloud_dog wrote: »

or for income tax reasons if you are a higher rate tax payer. All dividend and interest income received within a S&S ISA is taxed at 20%.

Dividend income is taxed at 10% or 32.5% (of the gross dividend). Within an ISA the manager can't reclaim the 10% however they can claim back the HRT amount, so the only main only benefit is to a HRT payer in respect to dividend income, ignoring the CGT benefits.

However, bond interest is taxed as savings income and is therefore taxed at 10%/20% and 40%, BUT this interest can be fully reclaimed by the manager for LR/BR and HRT taxpayers therefore making bond interest completely tax free, benefiting everyone.

Scrapper

Yes, for a basic rate taxpayer with capital gains under £9,200 a year there is no immediate advantage of investing in an ISA versus directly into a share or unit trust. BUT...

Think of the long term: will you always be a basic rate taxpayer?

If you invest £7,200 a year OUTSIDE an ISA every year for 10 years that's £72,000 plus investment gains - let's say £100,000 if you are really lucky. Sell all at once and you will pay 18% Capital Gains Tax on the £28K gain less £9.2K - so 18% on approx £19K. And if in 10 year's time you have become a higher rate taxpayer you'll be paying higher rate tax on the dividends if your investment is outside an ISA. But invest that £7,200 a year INSIDE an ISA and there will be no CGT to pay however large a capital gain you make, and no higher rate tax on the dividends received inside the ISA.

So, think of the long term. The question should be is there any disadvantage in investing via an ISA. For unit trusts there is usually no extra charge for investing via an ISA. For "self select" share investments there might be.

If there are no extra charges invest via an ISA.

cloud_dog

Scrapper wrote: »

So, think of the long term. The question should be is there any disadvantage in investing via an ISA. For unit trusts there is usually no extra charge for investing via an ISA. For "self select" share investments there might be.

If there are no extra charges invest via an ISA.

Well, I'm not aware of any S&S ISA that doesnt have an annual charge for the account/wrapper, so thats a disadvantage and it is S&S ISA we are talking about, not fund based ones.

It all depends on how much you have and how you manage your investments, or at least the liquidation of any investment. Primarilly S&S ISA protects you from CGT (ignoring the income side of this for someone starting off).

I have a portfolio (split between myself and my wife) of approx £100k. I have only recently started moving monies from our standard S&S account in to the ISA accounts, primarilly because I recognise in a number of years time I will be liquidating to repay the mortgage.

I am a 40% tax payer BUT, I have managed quite well in managing the investments so no extra tax has been payable.

Also, you need to bear in mind that some investments cannot be held within an ISA wrapper (gold, most AIM shares, etc).

So, bottom line is that there isn't a one size fits all answer to the OPs question, it depends on circumstances etc.

cloud_dog