FOOL SCHOOL
Self-Select ISAs

April 2, 2004

If you want to pick your own shares, rather than use an index tracker or managed fund, then you can wrap them up inside an ISA as well. What you need are the bare bones of the ISA wrapper, without the fund inside. These are called self-select ISAs and most stockbrokers offer them.

Once you've got your money into a self-select ISA, you can buy and sell individual shares within it. Think of it as a special account. So long as your investments stay in that account, you can treat it just like any other dealing account, except that any profits you make will be tax-free. Self-select ISAs simply allow you to shelter gilts, corporate bonds and most types of shares. There is usually a small annual fee to pay for holding an ISA account, in addition to the charges you incur when trading shares.

You pay no tax on any income received from investments within an ISA. Thus, they are more attractive for higher-rate taxpayers. At the time of writing, you also receive a tax credit on any dividend income received within an ISA. However, this benefit ceases on 5 April 2004.

If you like, you can even transfer in shares you already own. However, as all ISA subscriptions have to be made in cash, your stockbroker will have to sell the shares and then buy them back immediately within the ISA. This means that you will lose out, because of the spread between buying and selling prices and the fact that you also have to pay stamp duty. Many brokers only charge one commission fee for this transaction, rather than separate fees for the sale and purchase.

Many brokers will allow you to bundle together self-select ISAs from different years. This gives you greater flexibility as to the amounts you can buy and sell. In addition, it will probably cost you less in annual charges. 

It is possible to put trackers and managed funds into self-select ISAs alongside your individual shares, but this can prove expensive, as you'll be paying not only a self-select ISA manager, but also the product provider. If you want to hold a combination of investments, it's probably better to make good use of your annual Capital Gains Tax allowance for some holdings, as well as holding an ISA.

It's also worth noting that you can't hold AIM or OFEX shares within your ISA, as these are not 'recognised stock exchanges' (although you do get other tax concessions with these shares). 

> Find out more about Self-Select ISAs.