When holding funds (OEIC,ITs, Shares) inside an ISA or SIPP there is no CGT or income tax to pay at all. In reality it means no additional income tax to pay given the Company has already paid the tax as part of the Corporation tax regime which costs as already paying lower rate tax.

However if you hold funds/shares outside of the tax free wrapper then potentially there is CGT and/or additional income tax payable depending on the gain and your income level. If you are still a basic rate tax payer (having taken all income including dividends into account) then there is no further income tax to pay, if not then there is. Whether taking the income or reinvesting it, or whether you hold funds as accumulation or income units, extra income tax is due if you are a higher rate tax payer.

Generally an ISA wrapper doesn't do a great deal for a basic rate tax payers when it comes to investments rather than pure cash savings as far as the income is concerned. Unit trusts/OEIC/ITs are actually quite tax efficient in their own right.

The main benefit is in avoiding CGT which given it cannot be rolled over or accumulated year on year potentially is quite valuable if holding onto an investment for many years. A small initial investment could easy exceed the CGT limit after say 20 years.

Investments held outside a tax free wrapper would need to be sold and something new purchased (or wait for 30 days to repurchase) to establish a new cost basis when the gains get near to the CGT level. Apart from the added transaction costs there is always the risk that the CGT level may change. It also means switching investments for rebalancing, modifying risk level or simply finding better funds is potentially made more difficult given the timing may not always be right.

There is no disavantage to using an ISA over not using one even if it has to be sold, given again you only get the opportunity once a year. Also if you have an ISA then it should never be stopped, unless you need the mone, as you are wasting a potentially valuable tax shelter in years to come

Good afternoon Sllytrob,

I wish I had isas fron the very begining . A very good way to save in the long term.


normski

We are big fans of both stocks and shares ISAs and Junior ISA's!
The latter is even better, as you have an additional 18 years to compound your returns.

Why?

Have a read at: http://dividend-income-investor.com/junior-isas/

David Chapman makes a good point – I also hold mainly bond funds within my ISA which saves me a lot of tax. Check the type of income paid by investments – DIVIDENDS or INTEREST. Dividends are paid with a notional 10% tax credit. Basic rate tax payers pay no further tax when held outside an ISA; however this 10% cannot be reclaimed even when the investment is held within an ISA, but investments paying interest are tax free within an ISA. If you have more investments than your ISA allowance and these are a mixture of dividend and interest, then make sure that your INTEREST paying ones are held within the tax shelter and the DIVIDEND ones are outside. This can have a significant effect as interest is taxed at a higher rate and can all be reclaimed. I'm not a tax expert but my understanding is that this interest / dividend rule applies to all investments, not just funds, except Preference Share income which is paid on a fixed coupon but is treated like ordinary shares (dividend).

Brian Richards is right - I have invested in
Invesco Monthly income plus
Invesco Distribution
Investec Monlthly high Yield
amongst others - these investments are within my ISAs and give me a tax free yield of 6% + not bad in todays low interest climate - You have to accept however that the fund values will fluctuate.
Additionally you can save on both initial and continuing fund charges if you invest via a platform:-
Eg - Cofunds via Chartwell or Vantage via Hargreaves Landsdown

Hi Clive B,
I think the result is the same either way ?
I've re-done one of my recent calculations doing it the way you suggest, and I get the same answer as I did originally.
TJL

No apology necessary, it's confusing at the best of times!
Regards
TJL

Douglas Gordon said,
"Dividends are paid with a notional 10% tax credit. Basic rate tax payers pay no further tax when held outside an ISA; however this 10% cannot be reclaimed even when the investment is held within an ISA, but investments paying interest are tax free within an ISA."
But is it not possible for a non-taxpayer to reclaim this 10%, and if so, is this done via tax return?

D O'Callaghan

You might want to take a look at this on the HMRC site, gives some info - though I couldn't find a simple answer to your question (and I pay tax, so don't know the answer from personal experience)

http://www.hmrc.gov.uk/i...uals/savings-income.htm

Simplest way might be to ring HMRC

Apologies if this point has already been made, but I believe the 10% is claimed back on your behalf by the fund manager if you are invested in a bond fund in an Isa?
If this is of interest to you it might be worth looking into what a 'bond' fund is exactly - I think it means a fund which is 80% invested in fixed interest (so can be 20% equities), but this is off the top off my head and I haven't checked.
Regards.