Stocks and shares ISAs were given a special privilege by the Chancellor, Gordon Brown when they were introduced in 1999. They were allowed, for five years, to reclaim the 10% tax credit deducted from dividends, paid by UK equities. This meant that it could be more tax efficient for people to hold stocks and shares within an ISA wrapper, rather than outside it.
As 2004 comes closer the 10% tax credit reclaim is set to go. However, many fund managers are lobbying for it to stay. There has been no word from the Government on the issue but as the deadline gets closer and the lobbying increases, something will need to be said.
From our own conversations with the Inland Revenue, it would appear that the Government has no intention of allowing the tax credits to remain.
Our view:
ISAs can be very tax-efficient investments, especially if you are a higher rate tax payer or if you use your capital gains tax allowances. Be careful of the charges imposed for opening and running the ISA though. High charges can eat into the value of any profits made.
Visit our guide to choosing an ISA in the Savings Adviser.com.