Putting shares into an ISA wrapper

Andrew Sutherland | Ross Johnston/Newsline media

Q I have shares in six companies which in total cost £15,000 and using dividend reinvestment plans [DRIPS], and are now are valued at £56,000 before brokers fees. Last year I received dividends of £2,087 on which I paid £535 Income Tax. Obviously these shares should be in an ISA wrapper so I would not have to pay tax on the dividends, but would I have to sell them first and pay Capital Gains Tax, then buy a separate Stocks and Shares ISA? Or can they just be put into an ISA wrapper, say over three years, to remain within the annual limit?

A Well done! You have followed the strategy of one of the world’s greatest investors, Warren Buffett –buy and hold. This is prudent, as is seeking to hold your investments within an ISA.You have provided total figures so we can look at your portfolio in aggregate, but for specific recommendations or advice, further information would be needed.

We can, however, illustrate the mechanics involved with switching the shares into an ISA. Once within an ISA, income from the shares would be free from Income Tax and any future growth would also be CGT-free.On the way into the ISA, CGT would apply to any chargeable gains which exceed its annual exempt amount, currently £3,000.

This means you could release £4,000 from your portfolio each year tax free. Anything above this would be liable to CGT at 24 per cent as you are a higher rate taxpayer. However, to do so would take a considerable number of years to transfer your portfolio into an ISA, dampening the benefit of the improved tax efficiency.

Essentially, the transfer into an ISA is a balance between achieving future tax-free income and paying a degree of CGT in the meantime in order to make the switch more quickly.

To achieve this, by releasing about £23,500 you would raise £20,000 for an ISA contribution after CGT has been deducted.

By adopting this approach, over three years you would expect to pay a total of nearly £7,700 in CGT and expect to save some £1,070 in income tax over the same period – a total net cost of more than £6,600.That cost would effectively take 13 years to recoup in reduced Income Tax.

Tax associated with raising the full ISA allowance annually would be onerous and take a significant period to pay off so the most prudent solution to mitigate for tax will be either somewhere in between raising the full ISA allowance and only raising £4,000 each year, or continuing to bear the ongoing tax burden.

Reaching a conclusion would be made much easier in partnership with a qualified financial planner acting as a sounding board.

Acumen Financial Planning Ltd is authorised and regulated by the FCA, FRN 218745. The content of this article is the opinion of Andrew Sutherland and does not constitute advice or recommendation

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