What is an Investment ISA?
An Investment ISA is a savings account with added tax benefits, in which you can invest in stocks and shares.
Just like any other type of ISA, an Investment ISA is free from the following taxes:
- Capital Gains Tax
- Income Tax
- Dividends Tax
This means that if your investments grow over the long term, you will have peace of mind that you will not be taxed when you come to sell them.
You also won’t have to worry about declaring any dividends you receive on your tax return each year from these investments, as you would with a general savings account.
How are Investment ISAs different to Cash ISAs?
Unlike with a Cash ISA, in an Investment ISA, you can invest your money in the stock market to access greater growth and income potential for your savings.
An average performing Investment ISA can significantly outperform even the best rate Cash ISAs, as long as you are willing to accept the increased risk that accompanies them.
You can invest directly in shares of companies, or you can purchase investment funds that will invest in lots of different companies for you.
Top Five ISA Investments:
You can hold a wide range of investments within an Investment ISA, so we have compiled a list of the five most popular options to compare:
- OEICS (Open Ended Investment Companies)
OEICs also invest in a specific sector or market and are usually restricted to a specific country or continent. They are managed by a fund manager who will pick the underlying investments and take an ongoing free directly from the fund.
- Unit Trusts
Unit Trusts are funds that invest in a particular sector or geographical area. Investor money is pooled together and invested collectively by the fund manager who takes an ongoing fee.
- Investment Trusts
Investment Trusts also pool investors' money together in order to invest in other companies that fit a certain investment strategy for a particular sector. They trade on a live stock exchange like a share as opposed to OEICs and Unit Trusts that are traded just once per day.
- Shares
Shares of any publicly listed individual company. These are considered as higher risk compared to funds because your investment is not diversified across multiple companies.
- ETFs (Exchange Traded Funds)
ETFs are also traded live on a stock exchange and usually track a particular index like the FTSE 100. As they simply track an index and are not managed by a fund manager; the ongoing fees are usually lower than Investment Trusts and funds.
What is a Managed ISA Portfolio?
There is a vast selection of investments available, and if you do not feel confident selecting your own, then a managed ISA portfolio may be the best Investment ISA for you. A professional portfolio manager will control this investment for you, but you will have to pay higher fees for the privilege.
They will spread your investment across numerous shares, funds, and other assets to ensure that it is diversified and has the right level of risk for you.
What are the different types of Investment ISAs?
Along with standard Investment ISAs, you can also open Investment Junior ISAs and Investment Lifetime ISAs. The best ISA to invest in will depend on your individual savings goals.
The following key account features are great to compare ISAs with:
Junior ISAs:
- Can be opened for children by their parent or legal guardian
- Children have an annual ISA allowance like adults, which is £9,000 for the current tax year
- The investment and tax rules are the same as standard ISAs
- No withdrawals are permitted until the child reaches the age of 18
Lifetime ISAs:
- HMRC adds a 25% bonus on top of all contributions
- Withdrawals must be for a house deposit or at age 60. Otherwise, the government bonus will be revoked
- Individuals have an allowance of £4,000 in the current tax year
- The same tax rules apply as standard ISAs
Can I withdraw money from an Investment ISA at any time?
With a standard Investment ISA, you can withdraw funds at any point. You will first need to sell any investments in your portfolio to realise sufficient cash for your withdrawal.
Depending on what investment you hold, it usually ranges from two to five working days for trades to complete and settle and for your withdrawal to go through.
The exceptions to this rule are for JISAs and LISAs, which are details above.
Will I lose my ISA allowance if I make a withdrawal?
You will not lose any of your annual ISA allowance if you make a withdrawal; however, you will not be able to reinvest your withdrawal in the same tax year without using a portion of your ISA allowance.
What are Flexible Investment ISAs?
A Flexi-ISA allows you to reinvest any withdrawals you’ve made in the same tax year without losing your allowance.
For example, if you withdraw £5,000 at the beginning of the tax year, you could reinvest that £5,000 later in the year along with your full £20,000 ISA allowance without breaching any rules.
You will need to check with your ISA provider as to whether your account is classed as a Flexi-ISA.
What is the best performing Investment ISA?
The best performing Investment ISA depends on the underlying investments that you purchase within your ISA.
Aside from the underlying investment choices, the most important way to compare Investment ISAs that will affect your portfolio’s overall performance is by looking at your ISA provider’s charges.
Your provider will charge an annual fee based on the value of your portfolio, and it often varies depending on what investments you hold and how much money you have invested.
The most important questions to ask are:
What percentage does your provider take each year?
Does this percentage vary depending on what investments you hold?
Do they apply a tiered charging structure?
Are there any additional regular administration charges?
Some providers apply a tiered structure to their fees, meaning that high-value portfolios will have access to lower rates over a certain threshold.
For example, one provider may have a high annual charge, but end up being cheaper for portfolio values in excess of £250,000 due to a tiered fee structure.
Additionally, some providers charge more to hold shares than they do for funds, and so depending on the makeup of your specific portfolio, certain providers may be cheaper for you despite being more expensive for other investors.
How many Investment ISAs can I have?
You can have as many Investment ISAs with different providers as you like; however, you cannot contribute to more than one in the same tax year.
You can contribute to both a Cash ISA and an Investment ISA in the same tax year, but not to two separate Investment ISAs.
If you have more than one Investment ISA and want to consolidate them then you can do this easily by completing a transfer form with the provider that you want to hold your consolidated ISAs with.
Transferring your ISAs does not use up your ISA allowance, and so you can consolidate as many ISAs as you would like without worrying about breaking the contribution rules.
Can I transfer a general investment account into an ISA?
If you already have investments in stocks and shares and you want to transfer them into an ISA investment account, then you can do so via a Bed and ISA. This is the process of selling and then repurchasing your investments within your ISA account.
A Bed and ISA is the process of transferring any shares or funds you hold in a General Investment Account (GIA) into an ISA wrapper and can usually be done online if you hold your investments with the same provider.
If they are held with another provider, then you will need to transfer your assets to a GIA with your ISA provider first before the Bed and ISA goes through.
How does a Bed and ISA work?
A Bed and ISA still counts as a contribution for your annual ISA allowance, and so you can only contribute up to £20,000 via a Bed and ISA in the current tax year.
You also cannot switch the investments directly into an ISA investment account, and a Bed and ISA is the process of selling and then repurchasing the assets within your ISA straight away.
This means that any capital gains held within these investments will be crystalised at the point of selling.
The maximum you can Bed and ISA in one tax year is £20,000 due to the annual ISA allowance, and so it is unlikely that you will crystalise any gains over your annual Capital Gains Tax allowance doing this (£12,300 for the 2023/24 tax year). However, if you have crystalised gains elsewhere in the year then you should speak to an accountant to check your tax liability.
Your ISA provider will try and complete the sale and repurchase of your investments as quickly as possible with a Bed & ISA so that you are out of the market for as little time as possible.
You will likely be charged for both the sale and the repurchase deals, and so it is worth getting familiar with these charges before taking action.
If you have a substantial unwrapped investment portfolio, then it will take several years to get it all transferred into an Investment ISA portfolio. However, once your investments are within the ISA wrapper you will have peace of mind knowing that you will never be taxed on them.
How do I pay money into an Investment ISA?
Contributing money into your Investment ISA is quick and easy, and most providers will accept the following methods:
- Online
- Mobile App
- Over the phone
- Cheque
- Direct Debit Instruction
Should I contribute a lump sum or via Direct Debit?
If you have the funds available, then you may wish to contribute your full allowance immediately to benefit from being invested in your stocks as soon as possible.
However, if you want to invest gradually over time, perhaps in line with your income, you can also invest via Direct Debit.
Investing in a stock gradually over time mitigates the risk of buying too much at volatile, high price fluctuations. However, it can also reduce the amount of time you spend invested in the stock and you could miss out on potential growth.
Which option you choose will depend on your circumstances and preferences, and neither is necessarily better than the other.
What do I need to set up an Investment ISA?
The only thing you need to set up an ISA is an internet connection to your telephone and your debit card to make your contribution.
For compliance purposes, your provider will need to verify your identity. In most cases, they can do this electronically based on your name, date of birth, and address.
However, sometimes, for example, if you have recently moved addresses, these searches can fail, and you need to prove your identity with verification documents.
If you need to do this, the documents you will need are usually two from the following list:
- UK Passport
- UK Full or Provisional Driver’s License
- A recent Utility Bill to your current address (dated within three months)
- A recent Bank Statement registered at your current address (dated within three months)
- Other forms of ID will be applicable depending on your provider’s requirements
