Why investors are still keen on ISAs.

 The end of the tax year usually sees investors rushing to take out an Individual Savings Account (ISA), with some firms doing as much ISA business in March and early April as in the rest of the year. This is caused triggered by the need to set up an ISA before the end of the tax year; as soon as the sixth of April arrives your previous year’s ISA allowance is gone forever. Some investors also treat the end of the tax year as the time to think about selling shares to use up their capital gains tax allowance. Capital Gains. The voluntary tax? In the 2010/11 tax year you must pay capital gains tax (CGT), at either 18% or 28% (depending on your highest income tax rate), if you sell assets and realise more than your capital gains allowance of £10,100. CGT is an unusual tax in that investors only get caught for it if they choose to sell an asset. If you never sell your investments, or keep below the limit, you won’t have to pay CGT. Investors whose portfolios contain substantial capital gains will often sell enough shares to use up their CGT allowance. This ensures that they won’t be taxed upon these gains in the future. Since these sales, like ISA subscriptions, are more likely to happen as we approach the year end, this can cause strange movements in smaller companies’ share prices and may throw up bargains for buyers! Jump through hoops Be warned. It’s very easy to fall into the trap of letting tax avoidance dominate your thinking. I’ve seen some people become be so keen to avoid CGT that they end up believing that spending £200 to avoid £100 of capital gains tax is a good deal! Many investors will jump through fiery hoops to avoid CGT, going as far as emigrating to countries like Switzerland which don’t generally charge CGT on share sales made by residents. If you ever think of doing this, check with an accountant before consulting a travel agent! ISAs stop CGT Many investors find that the most important benefit provided by an ISA is that sales within an ISA are exempt from CGT. Even if you start off with a small investment, it’s possible to build up a substantial portfolio within an ISA over time. Then you’ll really start to benefit from the CGT exemption. If you’ve ever had to deal with a complex CGT calculation, or paid an accountant to deal with it, you’ll also appreciate the fact that you don’t need to report sales within an ISA on your tax return. Capital gains means you’re doing something right I’ve always treated capital gains tax as part of the cost of owning shares. I discovered many years ago it’s far better to pay tax on a capital gain than to not pay tax on a capital loss. Keeping 72% (or 82%) of something is far better than getting to keep 100% of nothing. A taxing time At this time of the year I start to think about completing my tax return, even though the final date for submitting returns without being penalised is 31 January in the following year. If you have to complete a tax return every year, it will probably be good idea to keep track of your share purchases, sales, and your dividends as and when they occur. You should find that this saves you a great deal of time, compared to doing it when you’re filling in the return. If you use an accountant, turning up in their office with a bag full of badly sorted invoices, receipts, contract notes and tax vouchers ensures that they’ll charge you far more than if you had kept detailed records in the first place

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