ISA’s (Individual Savings Account)
With an ISA you can invest your full ISA allowance of £15,240 tax free into a stocks and shares ISA. You can invest either a lump sum or regular contribution from as little as £500 or £50 per month respectively.
There is no personal tax on the income or profit your investment earns, however should you pass away, your ISA will be subject to inheritance tax so it would be advisable to transfer it to your intended beneficiary in advance to avoid IHT. You do not need to include ISA holdings on your tax return. There are no initial charges or withdrawal fees. However share dealing and other charges may apply.
An investment bond is simply a tax wrapper, like an ISA but with different tax laws.
After investing in an ISA, it could be the next step and is designed for a medium to long term investment normally for five years and upwards. Through an investment bond you buy units in a fund or range of funds depending on your risk outlook. The funds can be a combination of cash, fixed interest securities such as corporate bonds or gilts (government bonds), commercial property such as warehouses, offices, retail space, and shares.
When investing in an onshore investment bond you are pooling your investment with other investors which allows you access to a wider spread of investments. This spread of investments helps you diversify the overall risk of your investment. Each fund will have an objective to let you know how and where the money is invested. e.g a UK Equity fund will focus on the UK stock market only.
Funds may have different management styles such as smaller companies, total return investing and fund of funds portfolios. It is important to consult your financial advisor and tax investor before making an investment decision. There is no personal income tax to pay should a bond increase in value. The fund itself pays some tax as and when income or capital growth is achieved and the rate it pays may be less than the basic rate of 20%. As an investor you may have some tax to pay when you cash in your bond.
Bonds can be a good way to provide either a one off, monthly, quarterly or annual income payment. You can withdraw up to 5% of the amount invested annually without the need to declare this on your self assessment tax return. The allowance is cumulative so unused amounts can be used in subsequent years e.g if you do not withdraw anything in year 1 you can take out 10% in year 2 and so on.
Each fund has its own risks detailed in the individual key investor information section and there is also a general guide to investing document. It would be advisable to read both and consult an advisor before selecting a fund. Please remember the value of your investment and any income from it may fall as well as rise and is not guaranteed.