This is a proper practice what you preach blog post. The ISA is a UK savings account but I’m sure there are lessons that other readers could gain or be encouraged to research into.
In March 2019, I received my first ever bonus. I can even remember the exact day I was informed and the 14 day wait until I received it. Somewhat boringly maturely – I didn’t buy a watch…
I had some consumer debt that I had to pay off first, exactly £1800. Then I used the rest to fund a holiday, live luxuriously for a month (rather than buy a watch, although this option was much less expensive) and, of course, save / invest the vast majority.
I put some money away in a cash savings Individual Savings Account (ISA). Nothing wrong with taking up the crap interest rate if the economy was to take a turn.
A sum of around £1500 I then invested in stocks. My first ever proper portfolio.
After copious amounts of research of which stockbroker to use, I went with my bank, Lloyds. A very strange decision really and not one that I think entirely makes financial sense. But I’m a bit old school and a lot of the stockbrokers which offer much lower equity trading fees just wouldn’t be bailed out by the government if it came to it.
There is nothing wrong with AJ Bell, Hargreaves Lansdown, IG, II and the like. Almost all my colleagues and friends use one of these. I just hadn’t had this kind of money to invest before, so better safe than sorry?
This week I had to sell out of every stock I’d bought (4 at roughly £400 each).
Because I hadn’t put them in an ISA. In the UK the government has allowed the creation of savings accounts which are exempt from taxation.
I hadn’t got the tax-wrapper that the government so kindly permits £20,000 of post-tax income to be invested and saved through. This means that the capital gains at the time of disposal of those shares will be waived.
The £20,000 per year allows you to gather a large savings pot over the course of your life and minimise your tax bill.
I’m more than happy to pay my income tax and contribute where I can, but who doesn’t want to minimise their tax bill?
Wait, so why did I sell them?
Say that they all tripled over the next 10 years. They went from £400 to £1200. Capital gains tax on this is 10% or 20% depending on your tax bracket. So either £80 or £160 of the appreciation in my stock value. Whereas if I bought them through the ISA, I would pay NO CGT.
I did incur £12 to sell and rebuy my shares. This would be worth it many times over if you had a sizable amount of your portfolio in shares.
Is it reasonable to assume they will triple in 10 years? Probably not. Similarly, it is not reasonable to assume I will sell them in 10 years. I only buy shares with money that I don’t need to access at any given moment (aka I didn’t need to liquidate).
I intend to hold any single stocks for >20 years and part of a retirement pot. Otherwise, if you were to buy and sell often, the £10/12/14 transaction fees do begin to eat into your profits.
If you haven’t considered investing before, then how cool would it be if I’d written an explainor post to help you get started?
This was a simple and small tweak to my personal finances. How much it saves me will be decided in around 20 years’ time. What we do know, is that anything that is in an ISA now, will always remain exempt from this form of taxation.