Stocks & Shares ISA for small investments?

I’m just getting starting with learning about investing and so far I have only bought one ETF and a couple of individual shares whilst I’m learning the ropes. I understand the tax advantages of a stocks and shares ISA, but am I right in thinking that at £3 a month it would be too soon for me to jump into signing up for the S&S ISA? Or am I missing some other advantage?

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Great question, it’s almost as if we planted this :eyes:

We can’t give advice but here’s the reasons why someone might want an ISA, even if they’re starting out with a fairly small portfolio:

  • The growth in your investments (capital gain) is tax-free
  • Your dividends are almost entirely tax-free (some dividends on overseas stocks are taxed at source)
  • You don’t need to worry about any admin or tax self-assessment

A capital gain is an increase in the value of your investment. In a normal investing account, that increase is potentially taxable once you realise it i.e. sell the investment.

You have an annual tax-free capital gains allowance each year (c.£12,000 in 2018–19, but check the official gov.uk guidance). That sounds like a fair amount.

However (and here’s the tricky but important point), your capital gain is measured as the growth on your investment since the date you bought it , not the growth year-to-year. And if you’re investing for the duration, it’s not that hard for an originally small investment to grow much bigger.

So, unless you’re investing for the short-term and in relatively small amounts, an ISA will almost certainly be your most tax-efficient route.

ISAs also mean you can avoid the admin and paperwork of tax self-assessment, if you go over the capital gains threshold (or hit any other HMRC reporting requirements). This isn’t too difficult but who wants more on their to-do list? :sweat_smile:

quote from ‘ISAs are coming!’ blog post

There’s a couple of obvious examples of situations where a small investor might get caught out - if they sold a second property or their investments increased in value over time, due to compound interest.

Capital gains tax (CGT) is tax on the return of an investment from when you bought it. Any investment — stocks, art, property (that isn’t your primary residence).

If you’re planning to invest long-term, either as a Buffett-esque investor or for retirement/financial freedom, through the magic of compounding £11k starts to become a very achievable gain on comparatively small initial investments.

The S&P 500 has grown by c.4.7% per annum over the last 20 years. At that rate of return an investment would have doubled in 16 years and triple after 24 years. Suddenly a c.£11k allowance doesn’t look so large!

quote from the ‘The totally NOT complicated investment tax post’ blog post

Remember that in order to benefit from the Capital Gains exemption that an ISA gives you, you need to purchase the investments that you’ll sell in subsequent years within your ISA. You can’t simply transfer your investments into your ISA in the year that you plan to see them, as transferring your investments means selling them in your regular Freetrade account (GIA) & buying them back, within the ISA.

There’s more details about the benefits of ISAs in the ‘ISAs are coming!’ blog post. And lots more about tax in the The totally NOT complicated investment tax post.

Sorry for the wall of text but I hope that answers your question?

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To add to Alex’s extensive information, it does very much depend on how much you invest.

If your portfolio is within the range of £10,000, it is unlikely that your dividends will exceed £2,000 per year (current tax free allowance) and you are also very unlikely to obtain capital gains of £11,700 (shares’ growth allowance when you sell them [e.g. you buy an ETF for £100, you sell it later for £110, your profit is £10. Up to £11,700 per year is tax free even without an ISA]).

Whilst this is quite general and may not apply to every individual, you can at least keep track of your investment performance, and if you get closer to the dividend/growth values mentioned above, this is when you may want to seriously consider an ISA.

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Quick question and probably a stupid one. The capital gains tax allowance this is separate from income tax allowance?

So I have my income tax allowance. I’m over that and paying tax. I know invest shares and sell some for profit. Because I’m above that tax allowance do I need to pay tax? Or do I also have an £11,700 capital gains tax allowance that you’ve mentioned?

In which case also like you say, ISA’s and the cost might not be necessary for starting investors with smaller portfolio’s?

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Income tax and capital gains tax as separate allowances, so you can get the benefit of both of them.

This does depend on the individual though, one size does not fit all. There may be people who’d prefer to ignore the allowances and rather keep everything tax free in long term. If you a lucky enough to pick a stock that skyrockets in five years, you may be well above the allowance.

Also remember that the allowances do not roll over to the next year and even in you hold a stock for five or ten years, once you sell, the entire growth will be used against the allowance you have in the year of selling.

To give some context, if you invest £5,000 in company X today, and it becomes £50,000 in 2028, upon selling you will be charged =Tax Rate*(50,000-5,000-CGT allowance)

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Ok thanks for clarifying :slight_smile:

That means I probably do not need to worry about a Stocks & Shares ISA for at least another year or two.

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To this day I was thinking CGT has indexation relief but no more, so much I don’t know.

I am studying tax and never heard of that :grimacing:

Did some reading just now here

From 6 April 2008 taper relief was abolished, and indexation allowance was also removed completely from the CGT computations of individuals and trustees.

And
From Corporation Tax: removal of capital gains indexation allowance from 1 January 2018 - GOV.UK

Corporation Tax: removal of capital gains indexation allowance from 1 January 2018

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Regarding the Stocks & Shares ISA. Will they be automatically renewed each tax year or are we going to get the option on whether we would like to renew or not?

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It sounds like my investing amounts are going to be so small in the first few years that I’d be better off sticking with a basic account and considering the ISA down the line. I think at this point the monthly cost of the ISA would wipe out any earnings.

Thanks for the info.

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Hi @Fulforce,

When you apply for our ISA you complete an application form which includes the following statement

“I apply to subscribe to a stocks and shares ISA for the tax year 2018/19 and each subsequent tax year until further notice.”

So it will be a rolling application. There are a couple of things to note on this:

  1. You need to subscribe each tax year for it to roll over and apply in the next tax year without having to complete a new application form again. There is an exception to this, which is the first year (so in the example above 2018/19), if you make an application but do not subscribe in the first tax year your application will remain valid for a subscription in the next tax year.

  2. If your ISA is open with a position we will still charge the £3 a month fee.

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A post was merged into an existing topic: ISAs are out :boom: let us know your thoughts here

I’m new to trading so please be patient.

If I take a Freetrade ISA I know I would not pay corporation tax or tax on dividends. But I get a tax allowance on these anyway which I can’t see being exceeded. To go over the tax allowance you need a large ISA achieved over many years.

The only benefit I can see to the ISA is if you plan to use the ISA 20k allowance for say the next ten years, or perhaps you have a large cash ISA you will move.

As I don’t expect to put £20k into a shares ISA for the next ten years there is no need to get the ISA and so save the £3/month fee.

Am I missing something?

If you get some big winners or are in this for the long term, you will probably look back and kick yourself for not paying £3/month. Just the ease of not having to keep track of dividends, capital gains etc., not having to file related taxes …

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Totally agree but would stress even more, the first and worst mistake you can make being in the UK with buying stocks is to NOT buy a ISA account!!! NO TAX - some of the very best words to ever hit someones ears, the words “NO TAX”.

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What you are saying and your concerns are all valid.
I think it’s important to understand what investment scale we are talking about since you mentioned that you will not fill the £20k quota.

So, you’ll pay £36 per year for the Freetrade ISA.
If you have £1000 invested then this is effectively equivalent to a 3.6% fee which should ring alarm bells - this is higher than any fee you should ever be happy to pay when investing, especially since on top of this you might have FX fees, stamp duty, fund fees etc.

However, if you have £10.000 invested your fee all of a sudden drops to 0.36% - very reasonable even taking into account the other fees on top you are likely to encounter.

This is very basic, it doesn’t take into account how much you add to your fund next year, the year after etc.

Only you know which ballpark you will be operating in - if you take the above principle you should be able to make a basic assessment as to whether or not the ISA is for you.

You could always start with a basic account and if your investments are doing well enough / your pot grows you can switch that to an ISA.

As a general comment seek to fill the ISA as much as you can each year. We all pay taxes on taxes on taxes. Make use of the one tax break that’s out there - no one knows when this might change.

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Can I check something…

You could always start with a basic account and if your investments are doing well enough / your pot grows you can switch that to an ISA.

You can’t just switch your shares from a GIA to an ISA account without selling and buying back? I’m asking here.

@GoAt Yes, you are correct. HMRC rules stipulate that only cash^ may go into an ISA (that is the way the HMRC monitors the £20K limit). Hence shares owned outside an ISA need to be sold** and bought again inside an ISA (This sell and buy is termed as a “Share exchange” or a “Bed and ISA”).

^ Not strictly true - a direct transfer is allowed where the shares were issued to the investor under a schedule 3 SAYE option scheme or some other schemes that are related to employee perks.
**And naturally the sale of the original investment is a disposal for capital gains purposes.

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Thank you everyone for the range of views. I agree Koni, the £3 fee is not excessive. My main feeling is I won’t break the capital gains limit for several years, but as others stated if I hold an ISA for a few years there is a chance I will.

I have about a 5 year time scale in mind having had cash ISAs for many years. I have to do a tax self assessment form each year so the reporting to the tax office is something I’m used to.

I guess the decision is around holding a portfolio for several years and it’s growth. At some point I see you will exceed the allowance and there was a good point that the tax situation could change for future assessments. So maybe as a new shares investor growing my portfolio slowly I leave it for a year to gain more experience.

Happy New Year everyone.