Stocks & Shares ISA rules
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
Stocks and shares ISA rules aren’t that difficult to get your head around, with this guide detailing everything you need to know about this method of saving for the future…
Setting up and transferring a stocks & shares ISA
It’s important to begin by stating that while you can open a cash ISA if you’re a UK resident aged 16 or over, you must be aged 18 or above to open a stocks and shares ISA. Furthermore, you are not able to open an account either with someone else or on behalf of another individual.
Once you have a stocks and shares ISA in place, ISA providers have to allow transfers out but are under no obligation to accept a transfer in. Therefore, it’s important to check this before beginning any transfer procedure, if you would like to pursue this option down the road.
Take note too that stocks and shares ISAs can be cashed in at any time. However, we believe that you should plan to invest for at least three to five years when opening a stocks and shares ISA.
The amount that can be put into a stocks & shares ISA
For the current 2018/19 tax year, you can pay a total of £20,000 each year into an ISA. Be aware though that this annual allowance refers to how much you are allowed to pay in and not the entire value of your investments. As a result, you won’t be able to top up your ISA in the same tax year if you place your full annual allowances into an ISA and then it falls in value during that period.
The annual allowance also expires when the tax year ends, with any allowance that hasn’t been used lost — it can’t be rolled over to the next tax year.
During a single tax year, you are only allowed to pay into one stocks and shares ISA. However, it’s up to you if you would like to invest the entire allowance in stocks and shares, in cash, or into a combination of the two. This process was introduced in July 2015 and replaced the previous ISA system where you would get half your yearly allowance in cash and the other half in shares, or you could pick to place all the allowance in cash or all in shares.
The tax benefits that stocks and shares ISAs provide
There are certain tax benefits when opening a stocks and shares ISA.
For one, you are not required to pay any capital gains tax on profits which are made from share price increases. Undertake an investment outside of an ISA and the profits which are made above the annual capital gains tax allowance — which is set at £11,700 for the 2018/19 tax year — would be subject to tax that is set at 18% for basic-rate taxpayers and 28% for both higher-rate and additional-rate taxpayers for the 2018/19 tax year.
There’s also no tax applied to dividend income inside a stocks and shares ISA. You’d only get a £5,000 dividend income allowance outside of an ISA, with basic-rate taxpayers paying 7.5%, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers in the 2018/19 tax year..
With a stocks and shares ISA, you won’t be taxed on interest that’s earned on bonds either.
Deciding between an active fund and a passive fund
There are two broad categories of stocks and shares ISAs — so-called active funds and passive funds.
Active funds see a manager being employed to select stocks with the hope of beating the market. Meanwhile, passive funds — which are also referred to as tracker funds — work by solely following an index like the FTSE All Share or the FTSE 100. If the market that is being followed goes up or down, so too does the value of the stocks and shares ISA.
How your stocks and shares ISAs are covered
The fund manager of your stocks and shares ISA should be covered by the Financial Services Compensation Scheme (FSCS). If they are and they go bust while owing you money, you will be able to claim compensation of up to £50,000 per person, per institution.
Please take note though that the FSCS does not provide compensation for the poor performance of ISAs.
Invest in our Fully-Managed Investment Portfolios in a stocks and shares ISA here at True Potential Investor and make use of your 2018/19 £20,000 tax-free allowance.