Advantages of ISAs

Despite the abolition of the 10% credit reclaim (since 6 April 2004, ISA managers can no longer reclaim 10% dividend tax credit on shares ISAs), equity ISAs are still valuable investments for the following reasons:

1. Higher rate taxpayers do not have to make up the further 22.5% income tax they would have to pay if the investment was held outside of an ISA wrapper

2. All growth on the investment is free from capital gains tax

3. Equity investments have the potential to produce a rising income and capital growth over the long-term

4. Investors do not have to account to HMRC (Her Majesty's Revenue and Customs) for any income received or on any disposals

It is also important to remember that this issue does not affect corporate bond and fixed interest funds held within an ISA. Income from these funds is classed as interest and is subject to 20% basic rate tax, which will still be able to be reclaimed. For those seeking income, it is likely that a higher rate of income will therefore be available from such funds, although the potential for long term capital growth is diminished if not eliminated altogether.