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You can put your money into any fund run from the UK or any company listed on a recognised stock exchange. The latter means most major markets, with the exception of AIM, the Alternative Investment Market for small companies that is run by the London Stock Exchange.
Shares ISAs and Tax
The income tax benefits from share ISAs are less pronounced than for cash ISAs. Outside of an ISA you don't pay any tax on dividends if you are a standard-rate taxpayer. But you do have to pay some tax if you are a higher-rate taxpayer. Within an ISA the government will allow you to reclaim a 10% tax credit on your dividends. Your ISA manager will do this automatically. However, this only applies until 2004 when the reclaimable tax credit will disappear so, at that stage, you will lose this benefit. After this time, if you are a standard-rate taxpayer the treatment of dividends inside and outside of an ISA will be same.
The main tax benefit that share ISAs offer is protection from Capital Gains Tax (CGT). If you are making a small one-off investment in an ISA then it is unlikely that you will have to pay much in the way of CGT. However, if you intend to use your full allowance year after year then you may have a substantial bill to pay years down the line, especially if you wish to cash in over a short timeframe. Shares ISAs protect your funds from CGT. In the case of funds there are often no additional amounts to pay by sheltering your investments within an ISA. If you are investing in individual shares you may some additional charges to pay but these are often capped if you bundle together several years' worth of ISAs.
There is one tax you can't escape however. This is stamp duty which is payable on all share or fund purchases. It is charged at 0.5%. There is no stamp duty to pay when you sell.
DIY or Hands-Off?
Financial institutions offer different types of shares ISAs so you need to decide whether you want to be a hands-on investor or not before you open a share ISA. For example, some will let you buy a simple index-tracking ISA that follows the fortunes of a particular index. These are often the cheapest and easiest types of ISA to invest in. See our Tracker Centre for more details.
Alternatively, you can leave everything up to the particular ISA fund manager you've chosen and hope he or she does better than you could. In this instance, you'll be charged a fair bit more for their services and you're taking more of a risk with your investments. See our Fund Centre.
You can even choose your own individual shares if you opt for a Self-Select ISA. Inside a self-select ISA you can buy and sell as often as you want as long as your actual contributions from outside the ISA do not exceed the annual allowance. Once your shares are inside the ISA you can chop and change your portfolio as often as you like with no tax penalties as long as the shares, or cash from the sale of the shares, never actually leave the ISA. Some Self-Select ISA managers will even allow you to hold individual shares and unit or investment trusts -- side by side -- in your ISA. The point is that, in this instance, you will be making the decisions yourself. Our Self-Select ISA Centre has more on these products.
More: Find out how to get your free ISA guide | The ISA Centre