Personal Finance

Understanding Investment ISAs

Investment ISAs, also known as stocks and shares ISAs, are a very specific type of investment. The concept of them is one that many people struggle to understand, despite the fact that they offer a fantastic opportunity to invest money tax-free.

Here, we provide you with a quick guide to help you take advantage of them.

For more information, you could also take a look at this brilliant video from Killik & Co.(bottom right of photo)

What is an Investment ISA?

An investment ISA is a tax wrapper that offers the opportunity to invest an amount up to £15,000 (minus any capital saved in a cash ISA) tax-free.

The Benefits

The benefits of stocks and shares ISAs are two-fold: firstly, they’re free from income tax; secondly, they’re exempt from capital gains tax.

This spares you from paying 20 per cent on income tax as a basic rate taxpayer, or 40-45 per cent as a higher rate taxpayer.

The amount you’re required to pay as a higher rate taxpayer on dividend income would also be reduced.

In the sale of ordinary investments, you would also be required to pay capital gains tax on profits over £15,000. However, those stocks and shares held within an ISA wrapper are not liable for such a toll.

Where You Can Invest?

The funds secured within an ISA wrapper can be invested in a number of areas, including individual shares, bonds and pooled investments.

The choice of where to put them should be dictated by your attitude to risk and whether or not you would like full control or the help of an expert such as a fund manager.

How Much Can You Invest?

You can invest up to £15,000 per tax year (a tax year runs from 6th April to 5th April the following year), minus anything you’ve invested in a cash ISA. Money cannot be carried over from one year to the next, so any unused allowance becomes void at the close of the tax year.

Who Can Invest?

The opportunity to invest in a stocks and shares ISA is open to most people. The criteria are simple: you must be a UK resident aged over 18. Crown employees working overseas are also eligible, as are their spouses and civil partners.

Can You Invest in More than One Investment ISA?

No, you cannot, although you can have both a cash and an investment ISA.

Is It a Long-Term Investment?

It is recommended that investment ISAs are not touched for at least five years, so they are best suited to those looking for a long-term investment opportunity.

How Much Do You Need to Invest?

Although there is no set amount that must be contributed, many investment ISA mediums will require you to pay either a minimum opening amount or a monthly fee.

You may also be liable for charges, ranging from annual fees to opening and exit fees.

The Risks

As is the case with all investments, it’s highly unlikely that the capital contained within your ISA will be guaranteed. As a result, it’s not only possible that your investment could increase over time, but also that it could decrease. You should always be aware of this reality before investing money.

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