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I am going to explain how to trade tax-free within an ISA, this stands for Individual Savings Account, sounds Sexy I know, OK, you can stop yawning. But seriously…we have to give credit where credit is due. not only have I managed to create a considerable second income inside an ISA, but achieved it tax-free, That’s right, you don’t have to tell the tax man about any gains, absolutely nothing, nada!
If your reading this and you live in the UK, you probably already know that an ISA is a tax wrapper to protect from earnings made from interest, capital gains, and dividends. There are four different types of ISAs, a cash ISA, an Innovative Finance and a Stocks and Shares ISA and now the LISA.
In this post, I am going to be featuring the S&S ISA and show you can trade inside it to grow your wealth.
since replacing personal equity plans (PEPs) in 1999 you have been able to add several thousand pounds every year tax free, and from 2010 was raised annually with inflation. Then in 2014, good old George Osborn lifted some restrictions and raised the ceiling to £15000! it was then raised to £20000 in 2017 where it sits today.
As you can see, it’s a no-brainer, you really can grow your wealth quickly, especially when you factor in compound interest and for someone who can add the full amount each year, you know who you are… lucky buggers, stop smirking, alright go on…FILL your boots.
But seriously it really can provide you with a tax-free income. there is another way to trade free of income tax this is via spread betting, but I’ll touch on that in a later section.
You also need to think about what type of assets you want to invest in and double-check the broker you intend to use offers those types of instruments, It can be frustrating if you open an ISA only to find out you are not able to buy your favorite Apple shares.
What type of Assets are Included?
There is a variety of Assets to Invest in, these include shares, Government Bonds, which are money you lend to the government for a fixed return of interest over a fixed period, (ETF) Exchange Traded Funds which are made up of a basket of different assets,
For example, an index fund or a fund made up of commodities, which are open-ended which means they can be bought and sold throughout the day like an individual stock. And there are Investment Trusts which are close-ended and only have a fixed amount of shares on offer.
ISA Rules, "Yeah Man I Know" I mean are there any Rules within an ISA?
Yes, you can add up to £20000 within a tax year which runs from 6th April – to 5th April the following year,
They have also recently changed the rules, so you can now pay into two of the same type of ISAs in any given tax year. you can also transfer an existing ISA from a separate provider without it affecting your current ISA. You must also be over 18, otherwise, you can apply for a junior S&S or a cash ISA.
What if I have more than the £20000 allowance to Invest?
As mentioned earlier, there is another way you could trade tax-free outside of an ISA, and that is through spread betting, “Hey, stop, no come back” Alright I know for some, the mention of spread betting can sound scary.
But when used correctly you really can benefit from it. It will take far too long to go into detail in this post, but it can be used to buy and sell an asset without owning it, you take a position in which way you think the price will move.
Instead of buying 100 shares of a stock directly, you would bet the equivalent of £1 a point, and for every penny or point the share price increases you would earn £1.
If you believed the share price was going to fall, you would simply do the opposite and go short by selling the stock. This you can use for many markets including an overall index, for example ftse 100 or the s&p. Useful in a bear market.
Another benefit is being able to collect the dividend just as a shareholder and be eligible for a Rights Issue.
