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How self-select ISAs work
By Sam Barrett
If you think you can do better than the investment professionals, or you'd like to put your money into something you cannot buy off the peg, then a self-select ISA could be just what's required.
These are wrappers into which you can place any eligible investments. They work in exactly the same way as any other ISA - there is no capital gains tax to worry about and, although it's not possible to reclaim the dividend tax credit on income from any shares you hold in your ISA, there's no further income tax to pay.
Eligible investments
Eligible investments include shares listed on stock exchanges in the UK or overseas, fixed interest investments such as gilts and corporate bonds, investment trusts and collective investments such as unit trusts and open-ended investment companies that invest in shares, fixed interest or commercial property.
It's also possible to hold cash in a self-select ISA and many providers will pay interest on any cash in your account. But you shouldn't consider a self-select ISA as a home for your savings. Not only are the interest rates far from competitive, but HM Revenue & Customs (HMRC) doesn't look too fondly on this practice. Its rules state that you must be actively seeking to invest any cash, so only use this option while you're deciding where to invest.
Some investments aren't permitted at all though, such as shares listed on the alternative investment market (AIM) or funds that invest in these shares.
Contributions
Contributions work exactly the same way as for any other stocks and shares ISA. You can pay in up to £7,000 in a tax year (£7,200 from April) and once you have put the money into the account you are free to buy and sell as much as you like. On top of using this year's ISA allowance, you can also transfer existing ISAs into your self-select ISA. This would give you more money to play with and make it easier to manage your portfolio.
How this operates depends on where you are transferring from, with some ISA providers requiring you to cash in your investment rather than transfer it. Whatever the rules, your new ISA provider will be able to oversee the process on your behalf.
You can also move shares you already own into a self-select ISA, within your annual allowance. To do this you will need to sell them, then buy them back within the wrapper. Although it sounds messy, the providers are happy to do this, with both transactions occurring simultaneously, often with only one charge.
There are also special rules if you'd like to put shares you receive through a Save As You Earn scheme into your ISA. Providing you transfer them within 90 days of receiving them, they can be lodged into the ISA without any need to sell them.
Whatever you stick in your self-select ISA it will be held in a nominee account. This is an account in the provider's name, although you'll always be the legal owner, but it makes it easier for them to manage your transactions and report to HMRC.
Costs
This extra choice and flexibility does come at a price, however. Unlike other stocks and shares ISAs, where charges are in the prices, you will pay a number of different charges for running a self-select ISA.
First up there's a dealing charge. This is paid whenever you buy or sell shares and can be either a percentage of the transaction or a fixed amount.
You can also benefit from lower charges if you're likely to deal on a regular basis, while some ISA accounts have even lower dealing charges. For example, if you don't mind when the shares are bought, you'll pay just £1.50 to buy shares with our own self-select ISA on Interactive Investor.
You might also need to pay an administration fee, but some sites, such as Interactive Investor, levy only trade fees. The average charge is a £25 to £50 flat fee, but it can be based on the value of your ISA portfolio, in which case it can run into thousands.
"This is effectively a penalty paid by customers, irrespective of their trading habits," says Rebecca O'Keeffe, head of fund management at Interactive Investor. "Bear in mind that a typical ISA investor tends to buy and hold. If your broker charges both an ISA administration fee and an inactivity fee, the combined cost of these fees is almost certain to make a serious dent in any profit."
There are also regulatory charges. Stamp duty, at the rate of 0.5%, is payable on every purchase. For example, if you bought £500 of Tesco shares, £2.50 would go to the Government in stamp duty. On top of this, if you buy or sell shares worth more than £10,000 within your ISA wrapper, you'll pay a fee of £1 to the Panel for Takeovers and Mergers.
Whether the dealing commission and stamp duty or a quarterly administration fee, these charges are met by deduction from your ISA contribution rather than an additional fee.
While self-select ISAs offer flexibility and control, they're not right for everyone. The charges mean they're not particularly cost-effective if you only want to invest a small amount. Paying a £10 dealing charge on a £100 investment effectively means you have to make a 10% profit to cover your costs - and this is before you pay any administration fees.
Similarly, if you wouldn't normally consider investing in shares because they're too risky, then even with the tax breaks, self-select ISAs aren't for you. But, if you do want to run your own portfolio - and have a go at beating the professionals - then they're the ideal vehicle.
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