Stocks & Shares ISAs

There are many different types of investment. Here are some examples:

• Corporate and government bonds. You basically lend your money to a company or a government in return for interest (don't confuse these with fixed-term bonds, which are basically savings accounts held for a certain period of time).
• Shares. You invest in individual companies. Owning a share is like owning a brick in a house wall. If the price of the house (company) goes up, so does your brick (share), and vice versa.
• Funds. Most people use funds when investing. These can include bonds, shares, a mixture of the two, or in some cases, cash. Most funds have a specific theme, around which all the investments are based.

A fund is simply another way to buy shares – but instead of you buying a slice of a company directly, you give your cash to a specialist manager who pools it with money from other investors (like you) to go and buy a job lot of shares in a stock market.

Each fund is made up of 'units' so if you want to invest, you'll need to buy units – and these come at a cost which varies from day to day.

The value of each unit will rise or fall (or stay the same, of course) depending on demand in the market for the fund. Say you want to invest £1,000 in a fund; if each fund unit costs £2, you can buy 500 units. Six months later, if each unit is now worth £2.50, your investment is worth £1,250.

The fund's theme could be anything from geography (European, Japanese, emerging markets), industry (green companies, utility firms, industrial businesses), types of investment (shares, corporate bonds, gilts), to the size of the company.

The combination gives you the risk factor. If the fund focuses on "fledgling biotech companies in emerging markets", all the elements involve a high degree of uncertainty. So if it goes well you could be in for massive gains, and if it goes badly, massive losses.

Alternatively, it could be a FTSE 100 tracker, where the fund simply invests in the UK's 100 biggest companies, and therefore is much more mainstream. While there can still be substantial ups and downs, the fluctuations are likely to be smaller.

You can also leave your money as cash in a stocks & shares ISA, but you typically won't get a great return (often much less than in a cash ISA or savings account).

CGT is a tax you'll have to pay on the gain you make when selling things such as shares, a second home (you don’t pay capital gains on selling your first home) and jewellery.

So if you buy shares at £1,000 and then sell them for £1,500, you’ve made a £500 gain. You might then have to pay tax on that. But it's important to understand that...

You’re allowed to make £11,700 of gains this tax year (2018/19) tax-free outside an ISA. So you would ONLY gain using a stocks & shares ISA in a year where you were making total gains over £11,700.

There are two ways you make money from investing. One is when the shares increase in value and then you reap a nice little profit when you sell them. The other is when they pay dividends.

Dividends are a bit like interest on a savings account. If a company makes a profit, it gives some of it back to you - it could be on a regular basis or as a one-off. And just as you have a personal savings allowance for interest on savings, you also have a dividends allowance each tax year where the first £2,000/year.

Any dividends received above this allowance will be taxed - at 7.5% for basic-rate taxpayers, 32.5% for higher-rate tax payers and 38.1% for additional-rate taxpayers.

However, dividend income received on shares held in a stocks & shares ISA will be tax-free. (Older investors may remember when there was a 10% tax deducted from dividends at source which couldn't be reclaimed, which meant a stocks & shares ISA wasn't quite tax-free - this was abolished in April 2016.)

If you're a higher or additional-rate taxpayer who receives taxable dividend income, then you must inform HMRC.

With corporate bonds, instead of investing in a company’s success, you’re effectively lending money to it for a set time. In return, it'll have to pay you interest.

You're taking the risk that it won't give you the money back, so it isn't risk-free. But the good news is...

If you've got corporate bonds, or bond funds within an ISA that pays out interest, you don't have to pay any tax on it.

If you're investing in corporate bonds outside a stocks & shares ISA, it'll fall under the remit of the personal savings allowance. This means basic-rate (20%) taxpayers – will be able to earn £1,000 interest with no tax while higher-rate (40%) taxpayers – will be able to earn £500 interest with no tax. Additional rate (45%) taxpayers get nothing.

Bear in mind that this allowance covers your normal savings interest in a bank too as well as other forms of interest. As with the dividend allowance, you'll owe tax on any interest earned above its limit.

Still not sure? It's time for a table on the tax benefits of a stocks & shares ISA...

Will you benefit from using a stocks & shares ISA?

	Capital gains tax < £11,700	Capital gains tax > £11,700	Tax on dividends	Income tax on bonds
Non-taxpayer
Basic-rate taxpayer (20%)
Higher-rate taxpayer (40%)
Additional-rate taxpayer (45%)

If you have other capital gains, such as you had a buy-to-let property and you've sold it, then if it made a profit, you could have used up your CGT allowance that tax year.

Outside the ISA wrapper, you're able to make £11,700 per year without being taxed - any amount over £11,700 is taxed. The exact amount of tax you pay depends on your taxable income.

If you're a basic-rate taxpayer, any gains between £11,700 and £34,500 are taxed at 18% on residential property, 10% on other assets. Any further gains that push you over £34,500 are taxed at the higher rate of 28% on residential property, 20% on other assets.

It’s worth remembering that if you filled up your funds each year so you had a couple of hundred thousand pounds, you are more likely to go over the threshold.

But if you're unlikely to go over your annual CGT allowance, then the CGT benefits of putting money in a stocks & shares ISA are negligible.

1. The greater return you want, the more risk you'll usually have to accept.

2. Don't put all your eggs in one basket. Try to diversify as much as you can to lower your risk exposure.

3. If you're saving over the short-term, it's wise not to take too much of a risk. It's recommended you invest for at least five years. If you can't, cash is often best.

4. Review your portfolio. A fund might be a dud, a fund manager might leave, or you might not be willing to take as many risks as you did before. If you don't review your portfolio regularly, you could end up with a stocks & shares ISA which loses money.

5. Don't panic. Investments can go down as well as up. Don't be tempted to sell or buy funds just because everyone else is.

If you invested a £10,000 lump sum and bought shares valued at £10 each, you'd have 1,000 shares.

If you bought £5,000 worth of the same shares per month over two months (amounting to 10,000 overall), you'd buy 500 shares in the first month.

But if the share price went down to £9.50 in the second month, you'd be able to buy 526 shares, as the shares are at a lower price.

So, rather than your full £10,000 investment being affected by the drop in share price, only half of your money drops in value.

In this example, a lump sum of £10,000 buys 1,000 shares while two payments of £5,000 buys 1,026 shares. Smaller investing on a regular basis means any drop in share price wont be too noticeable.