What are self-select ISAs?
A self-select individual savings account (ISA) is designed to house shares and shelter the returns from tax. As the name suggests, you select which shares to hold in your ISA, rather than have a fund manager make the decisions for you.
Self-select ISAs, like their cash ISA counterparts, are free of income tax and capital gains tax. The maximum you can hold in a self-select ISA or any stocks and shares ISA this tax year (2017/18) is £20,000.
Note that your annual ISA allowance is £20,000 but you can split this across different types of ISA - so you could have £12,000 in a cash ISA, for example, and £8,000 in a self-select ISA.
ISA tax advantages
The tax advantages of ISAs have reduced in recent years because of changes to the general tax regime.
For example, everyone has a £5,000 annual dividend tax allowance, which means they can earn this much in dividend income without having to pay tax.
The figure falls to £2,000 in April 2018, but this is still sufficient to protect the income from most private share portfolios from tax.
Only those on higher rates of tax who earn more than £5,000 of dividend income in a year (£2,000 from April 2018) thus enjoy additional income tax benefits from holding shares in an ISA.
As far as capital gains tax (CGT) is concerned, the annual allowance currently stands at £11,300. This is the amount of profit you could make from the sale of shares in a year without paying tax, even if those shares were held outside an ISA.
Again, it can be seen that CGT is only likely to become an issue for those with substantial (and profitable) share portfolios. But anyone who has invested in shares over a number of year might find themselves in this situation, which is why putting shares into ISAs makes sense for CGT purposes.
Why choose a self-select ISA?
Experienced investors who want more control over their investment choices often go down the self-select ISA route. They offer much more control, as you’re the one making the investment decisions.
Remember that the value of your investment and the income derived from it can go down as well as up, and you may get back less than you originally invested.
What types of self-select ISAs are available?
As well as individual shares, there is a range of other assets that can be held within a self-select ISA, including unit trusts, investment trusts, open-ended investment companies, bonds, gilts and exchange traded funds.
Remember that the value of these investments can fall as well as rise, so there is more risk attached with investing in a stocks and shares ISA than there is with a cash ISA.
When you choose to use a self-select ISA, you must also choose whether you need a broker that offers advice or one that doesn’t, known as an execution-only broker.
Execution-only brokers often have the lowest fees as they simply provide the internet trading platform you’ll need to trade shares and other investments. Conversely, broker firms that offer advice charge more because they will help you decide which shares to pick – using their knowledge of the markets.
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