A capital way to save your gains

Having the confidence to self select means that, while avoiding tax, you can start from scratch and have all the shares and funds you want within your mini or maxi ISA wrapper
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The Independent Online

Do you ever get the feeling that your financial adviser is not giving you all the options for investing in the stock market?

Do you ever get the feeling that your financial adviser is not giving you all the options for investing in the stock market?

Probably he or she is not. A commonly overlooked option is self select individual savings accounts (ISAs), a low cost way to invest directly in shares and pay nothing in capital gains tax.

Self select ISAs allow you to buildfrom scratch by selecting all of the shares or funds you want within your mini or maxi ISA wrapper.

In most cases you can choose any UK-listed shares, which can then be traded as much or little as you want. You can also hold other types of investment, such as unit trusts, within the fund. You can even keep part of the ISA in cash.

They may not sound very snazzy, but self-select ISAs are the only way to invest in shares and protect yourself from tax on your capital gain. This could save £20,000 on average over seven years.

Why then are self select ISAs largely overlooked? A major reason lies with financial advisers, Peter Ship, chief executive of the ISA trade body PIMA, said. "IFAs will tend toward managed products. Commission is built into their price structure." In contrast self select ISAs's low prices leave little for a cut for advisers.

However, a growing number of stock brokers are choosing to offer self select ISAs. One such is the self select ISA launched this month by iDealing, the bargain internet trading site. You can use your maximum ISA allowance of £7,000 to buy shares or transfer ones you currently own and put them within an ISA wrapper.

The tax break on any gain you might make creates some considerable savings. Foster Bowman, managing director of iDealing, points out: "If you invest £7,000 this year and then use your ISA allowance for the next six years, investing £5,000 every year, you would save £23,919.83 in capital gains."

The figures are based on an assumed growth of 12 per cent, which would give your total portfolio a value of £60,919. If you owned the shares outside the ISA, you would have to then pay the £24,000 in tax.

In addition to this, Colin Wilson, head of ISA and PEP investments at NatWest, says that self select ISAs allow you to "bed and breakfast" your shares: "You can sell shares you have at the end of the tax year to crystallise capital gains and then buy them back within an ISA. This is the only way to "bed and breakfast" now as the Government has barred people from simply buying back the shares outside an ISA."

The tax break is not limited to a self select ISAs, of course. It applies to any ISA. But the cost of this product compares favourably to other ISAs on the market. iDealing offers a flat charge of £5 a quarter and £10 a trade, with no initial charges. Practically all self select ISAs charge less than one per cent a year. These are head-turning prices, but there are other issues to consider. Some people may be afraid to select shares, or they just may prefer to do other things in their spare time rather than wade through company reports.

Self select ISAs do make more sense for certain groups.

Robert Guy, head of investment products at John Charcoal, said: "They are not perfect for everyone. But high earners who pay tax at 40 per cent and are comfortable in investing in shares would benefit considerably from self select ISAs."

However, any one in financial services acknowledges that the number of private investors is ever growing. It is also true that on average fund managers underperform the market.

A more meaty potential problem with self select ISAs is that if you are not vigilant they can actually end up quite expensive, like choosing the à la carte, rather than the set menu in a restaurant.

Jason Hollands, managing director of the discount brokerage Best Investment, says: "You pay for the ISA wrapper on top of the charges for the funds within in. If you buy an ISA through a fund supermarket you can often pay no fees for the unit trusts."

It is possible to put unit trusts within a self select ISA and, if you are careful, avoid high fees. But, if you do include funds, you will pay VAT on the management fee.

Bear in mind that while you receive 10 per cent tax relief on dividends earned through funds in ISAs, this will not always be the case - the Government is due to phase this out next year.

Another issue to investigate when choosing a self select ISA is exactly what status you have with your shares. With iDealing you do not own them directly - you effectively buy the rights to the shares. This means you cannot vote at annual general meetings or enjoy any store cards some retailers offer to shareholders.

Experts generally agree that these potential complications, together with the certain financial know-how needed, mean that ISAs of the self select variety are not for everyone. But for anyone who is thinking about buying a portfolio of shares, the reasons for doing it within an ISA could not be clearer.

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