Why self-select?
Self-select ISA plans have advantages if you want to invest in funds, shares or both. If you invest in an ISA offered by one fund management company and its funds perform badly, it will cost you time, money and hassle to switch to a different fund.
If you set up a self-select ISA with a fund supermarket or stockbroker, you can switch instantly and at low-cost. If you set up a self-select ISA with a stockbroker, you can buy and sell eligible shares and create your own tax-free share portfolio.
Lower costs
Some fund supermarkets make no charge for a self-select ISA other than the initial charge on the funds you buy - but these supermarkets usually ask for initial charges of no more than 1.5% compared with the 5% you would pay dealing direct with the managers.
Online stockbrokers usually make a small flat-rate charge for providing a self-select ISA - of course you then pay their normal dealing charges when you buy and sell.
Eligible investments
Within a self-select ISA you may hold fixed interest investment listed on a stock exchange, shares listed on a stock exchange in the UK or overseas, and collective funds authorised by the FSA for distribution in the UK that invest in shares, fixed interest or commercial property. You may not hold shares listed on AIM in an self select ISA though you may own units in a fund that invests on AIM.
Tax
Investments within an ISA are free of UK income and capital gains tax. All withdrawals from an ISA are free of tax.
Dividend income from UK shares is now paid net of the equivalent of UK standard rate tax, and this tax cannot be reclaimed in an self select ISA. However, higher rate taxpayers holding shares in an ISA avoid the need to pay extra tax on their dividends.
Dividends from overseas shares usually suffer withholding taxes in the country of origin and depending on the tax treaties between the relevant country and the UK this tax may be recovered by the ISA manager.
