Over the next few weeks, as the 2009-2010 tax year draws to a close and investors scramble to top up their ISA investments, we'll be taking a look at what Morningstar fund analysts are doing with their own ISAs. For more information on what an ISA is and how to take advantage of tax-efficient investing, watch this video. Our ISA page also has plenty of case studies and additional articles on investing in ISA-eligible vehicles and managing an ISA portfolio, while a quick search of our article archive will produce a list of relevant articles.
Alexander Prineas, Morningstar UK Fund Analyst:
Having lived in the UK for four years now, I’ve been somewhat remiss at taking advantage of the annual ISA allowance. As the deadline passes by each April, that year’s ISA allowance is lost forever. Sometimes I have invested small amounts during the year but never thought to do this in an ISA account. Then, as ISA season rolls around and April 5th approaches, either I run out of time or have no spare savings to commit. But this year I plan to change this habit and invest something into an ISA, even if it’s not the whole allowance.
The lack of spare savings hasn’t changed this year so, instead, I may choose to ‘Bed & ISA’ some existing investments that I hold. This means selling these investments and buying them back in an ISA wrapper. A negative is that I’ll incur transaction costs for doing this, but having them in an ISA account means that any future capital gains will be free from capital gains tax. As I’m still young, I have a pretty high risk tolerance so I’m happy to have a reasonable exposure to high growth areas such as emerging markets and commodities. These are the areas I plan to ‘Bed & ISA’ as they are risky, but have the greatest potential for growth and I’d rather not pay tax on any gains I can establish. I plan to hold the investments for several years yet, so I’m hoping that the tax-free benefit of an ISA will outweigh the short-term pain of the transaction costs. Although any capital gains crystallised on the sale of my investments is liable to CGT, it’s less than my annual CGT exemption allowance so I won’t have to pay tax on their disposal.
My main concern, therefore, is being out of the market overnight: if the price shoots up before the market closes on the day I sell, I’ll have to repurchase them the next morning at a higher price. I’m not overly worried about this though, as it would take a significant market movement to offset the long-term tax benefits of having the investments in an ISA wrapper. Of course, it could go in my favour: if the price falls I can buy the investments back at a cheaper price.
Given my lack of spare savings available at the moment, this strategy allows me to avoid losing another year’s ISA allowance, while ensuring any future gains in those investments will be free from both CGT and income tax--a smart move and one that makes me feel that finally I’ve made use of this tax-free method of investing.
Alex Prineas is a private investor writing about his own ISA portfolio. The views expressed in this article are those of the individual, and not of Morningstar, and should not in any way be construed as financial advice.
