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What is a stocks & shares ISA?

Category: ISAs
Author: Tim Leonard
Updated: 06/04/2018

A stocks & shares ISA is a tax-efficient way of investing.

In this guide find out:

How does a stocks & shares ISA work?

A Stocks and shares ISA is the common name for the investment side of ISAs. However, it can be a bit misleading as you can invest in a whole lot more than just the stock market.

As well as shares you can also invest in:

  • Investment trusts
  • Open Ended Investment Companies (OEICs)
  • Unit trusts
  • Government bonds (Gilts)
  • Corporate bonds

Basically, a stocks & shares (or investment) ISA isn't a different kind of investment in itself. Instead, it's a tax-efficient wrapper that goes around your investment to shield you from capital gains tax and income tax. However, it's worth remembering that your ISA pot would form part of your estate on death, so could be subject to inheritance tax at that stage.

It's also worth mentioning that there are charges involved with investment ISAs. There will probably be charges for setting up the investment, for making a share trade, and, where applicable, charges for managing an investment fund. If you want to cash in your investment early, or transfer to another investment, there may be charges for this as well. That said, this situation is no different to if you were investing outside of an ISA.

Just because it's an ISA, it doesn't mean that you are taking any less of a risk with your money than if you invested elsewhere. You could come out with less money than you originally invested if your investment doesn't perform or if you need to access your money early.

How much can you invest in a stocks & shares ISA?

Each tax year (6 April to the following 5 April) you get a new ISA allowance. In the 2018/19 tax year this allowance is £20,000. You can invest your allowance entirely in a stocks & shares ISA, split it between investments, cash and the new innovative finance ISA, or have the full amount in a cash or innovative finance ISA and have no investment part. You can also use up to £4,000 of your annual allowance in a Lifetime ISA to save for a first house or towards your retirement. For example, you can:

  • Put up to £20,000 in a stocks & shares ISA (you don't have to put any money in a cash version).
  • Split your allowance between a stocks & shares ISA and a cash ISA. For example, you could have £10,000 in investments and £10,000 in cash, or £15,000 in investments and £5,000 in cash.
  • Put up to £20,000 in a cash ISA (you don't have to put any money in an investment ISA).
  • Or put £7,000 in a cash ISA, £7,000 in an innovative finance ISA and £6,000 in a stocks and shares version.

Is investing right for you?

Although a stocks & shares ISA can be a tax-efficient way to invest, it is an investment nonetheless. Make sure that you are comfortable with the risks you are taking, and that you would be able to accept it if you lost money.

With investments there are two ways you could lose money:

  • Investments can fall as well as rise in value – you could come out with less than you originally invested.
  • Investments are longer-term undertakings (of at least five years). If you need to access your money in the early years you may well find that if the investment hasn't grown much, and after any initial set-up fees or access penalties are taken into account, you come out with less than you put in.

It's worth bearing in mind that you're now able to transfer any funds held in a stocks & shares ISA to a cash ISA, or vice versa, offering extra flexibility in how you choose to save.

The value of investment advice when buying an ISA

Good investment advice can be invaluable. Speaking to an independent financial adviser can help you make the most of your ISA allowance and find the investment that's right for you.

A financial adviser is required to take full account of your circumstances before making a recommendation, and will be able to explain the risks that you are taking.

Later on, if it transpires that the advice you were given was unsuitable, you would have cause to complain. If you arranged the investment yourself, without advice, you'd have less cause to complain if things went wrong.

What next?

Compare cash ISAs
More savings guides

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.