You may know that a stocks and shares ISA is a kind of Individual Savings Account (ISA) but surprisingly, many UK investors are not using them to hold their share investments!
If this is you, or you are interested in starting to invest in shares and wondering how you might make use of a stocks and shares ISA, then read on.
How Does A Normal Stock Broker Account Work?
If you want to trade shares on a stock market then you need a stock broker and these come in different types.
Without going into all the different types and features here, suffice it to say that most people nowadays will choose to open an account with an online stock broker.
Online stock brokers use something called a “nominee account” to hold your cash and investments.
What Is A Nominee Account?
Essentially, a nominee account is a bank account with share dealing facilities added, like this one.
Through your online broker account, you can view statements about what your nominee account contains, much as you would with an internet bank account.
Similarly, you can deposit extra cash into your nominee account before you invest it in shares and you can withdraw cash too.
When you buy or sell company shares through your broker account, the shares are deposited or removed from your nominee account, respectively.
Normal share dealing nominee accounts such as this are very easy to use and have few restrictions.
However, any income or capital gains that you generate with your shares in a nominee account such as this will be subject to income tax and/or capital gains tax and so need to be declared in your annual tax return.
This is no different though to what would happen if you use a more traditional off-line stock broker account with paper share certificates – dividend income and gains from rising share prices would be subject to the same taxes.
Now let’s look at stocks and shares ISAs…
What Is A Stocks And Shares ISA?
A stocks and shares ISA has all the same benefits of the nominee above, with a few bells and whistles added and a few restrictions too.
This amount is known as the stocks and shares ISA limit or stocks and shares ISA allowance for a given tax year.
As the UK tax year runs from 6th April to 5th April each year, this means that you have a separate allowance each and every year which you can put into your stocks and shares ISA between those two dates.
You are only allowed one stocks and shares ISA and/or one cash ISA each tax year but you can have a different ISA provider each year for that year’s allowance if you wish.
On the face of it then, having a stocks and shares ISA instead of a nominee share dealing account would seem like a bad idea.
However, stocks and shares ISAs have three BIG advantages over nominee share dealing accounts.
If you want to know what they are, read this article next!
How To Invest In Shares In An ISA
Alternatively, If you have any questions or comments about cash ISAs, cash ISA limits / allowances, etc. then please leave them below and I will answer…