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Stocks & Shares ISAs

What are they - How to use them

A Stocks & Shares ISA is an investment wrapper account where investments such as shares, bonds and unit trusts can be placed, and where both the income (apart from a 10% tax on dividends) and capital gains are 100% tax-free.

Some people wrongly think that an ISA is an investment itself, as in 'I'm going to buy an ISA', but this is wrong.

An ISA is just a wrapper account whereby investments are bought and then placed within the ISA - the investments are therefore wrapped within the ISA.

Think of an ISA as a box, you buy the shares/investments and then place them in this tax-free box.

How do Stocks & Shares ISAs work
Everyone over the age of 18 gets an ISA allowance currently £15,240 (2016/17).
  • This level is generally raised annually
  • A tax-year runs from the beginning of April to the following April (usually 6th April - 5th April)
The choice is yours of how to manage your ISA allowances and as you can see from the above they are very flexible.
Stocks & Shares ISAs - Allowable Investments
The following investments are allowed to be placed within a Stocks & Shares ISA -
  • Shares and corporate bonds issued by companies officially listed on a recognised stock exchange anywhere in the world

  • Gilt edged securities (Gilts are another name for UK Government bonds)

  • Government Bonds issued by other EU countries

  • Unit Trusts, Investment Trusts and OEICs (Open Ended Investment Companies)

  • Units or shares in Undertakings for Collective Investment in Transferable Securities (UCITS) funds based elsewhere in the European Union (these are similar to unit trusts and OEICs authorised by the Financial Services Authority)

  • Any shares which have been transferred from an HMRC approved SAYE share option scheme or Share Incentive Plan

  • Life insurance policies

  • Stakeholder medium-term products

  • ETFs (Exchange Traded Funds)
ISA money cannot be withdrawn and then replaced
An important point to remember with ISAs (both Cash and Stocks & Shares) is that once money has been withdrawn it cannot be replaced later in the year.
Can money be transferred between ISA accounts?
Stocks & Shares ISA Costs and Fees
Costs are the area where many banks, building societies and financial institutions love to play games. It's therefore sometimes hard to work out which is the right Stocks & Shares account for you, but be on the lookout for the following -
  • Setup fee - usually there is a one-off setup fee (although keep an eye out for special offers where this is waived) - the fee is normally around £25 - £50

  • Annual management fee for the ISA account - around 1% - 1.5%, sometimes this is a flat rate fee around £50 per year

  • Commissions - for buying and selling shares or other investments

  • Inactivity fees - if you don't trade x times per year or Calendar quarter some companies can charge this, often in the £20 - £50 range

  • Annual management fee of any funds that you invest in, around 1% - 2%

  • Initial charge fees - if you invest in Unit Trusts they normally levy what's called an initial charge around 5%. Invest £1,000 in a fund and £50 goes immediately to the fund manager

So if you open the wrong Stocks & Shares ISA account it's easy to pay ridiculous amounts of money to the provider. This is why it's so important that you do some research into the different providers and their charges before you buy a single investment.

ISA Transfers In and Out

Transferring in or out is where you want to move your ISA investments to a different provider. Perhaps you reduce your yearly fees by 50% by moving to another ISA provider.

This is entirely your decision and the best way to start is to first talk with provider you're moving to. As this is going to be new business for them they should be only too happy to help and provide you with all the support you need.

The transfer is nothing more than filling out a few forms and then waiting for 2 weeks. Do not sell any of the investments yourself (looking to buy them back through your new provider) as you will lose all the non-tax benefits. Instead, only sell (if you want to) when the shares are safely located with the new provider.

Occasionally, but not always, the provider you are leaving will charge an exit or admin fee of normally around £50.

Sometimes there can be problems with transferring ISAs, both Cash and Stocks & Shares - see this FAQ for more information and what to do.

LearnMoney Comment :
Stocks & Shares ISAs are not for everyone, for example you must know at least the basics of investing and more importantly the risks involved.

It's all very well to look at the potential rewards of a Stocks & Shares ISA over a Cash ISA - Cash ISAs can only return around the official interest rate whereas investing in the stockmarket can theoretically return large amounts over the years. But these same investments can also lose significant amounts of money, 25% - 50% within a matter of months is not unheard of.

Also, Stocks & Shares ISAs seem only worthwhile if they play part of a long term investment plan. For example, if you want to build up a significant sum to help fund your retirement a Stocks & Shares ISA is a great vehicle to use.

However if the value of your Stocks & Shares ISA might amount to just £1,000 -£3,000 over time then it would be preferable to buy the investments outside the ISA wrapper.

Ultimately, these ISAs are welcome in our personal finance tool box, especially for long-term savers looking to build up large balances over the years.

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