ISAs with a tax-free fringe on top

As the deadline looms for those wishing to buy ISAs in the current tax year, it is worth heeding a few tips from the experts

April 5 looms for all investors as a day of reckoning. Particularly for those who would like to buy an Individual Savings Account or ISA in the financial year ending on that date. For some the problem is not the common one of not organising it on time, it is whether they actually have any spare cash, up to the £7,000 per tax year the Chancellor allows to be invested in tax-free ISAs. Finding £5,000, £3,000 or just £1,000 could be asking a lot of many people's husbandry.

April 5 looms for all investors as a day of reckoning. Particularly for those who would like to buy an Individual Savings Account or ISA in the financial year ending on that date. For some the problem is not the common one of not organising it on time, it is whether they actually have any spare cash, up to the £7,000 per tax year the Chancellor allows to be invested in tax-free ISAs. Finding £5,000, £3,000 or just £1,000 could be asking a lot of many people's husbandry.

There are those with investments like shares and unit and investment trusts who don't know that it is possible to protect them from income and capital gains tax - ie give them an "ISA" protective wrapping. Unfortunately the Inland Revenue will not allow a simple transfer of shares or units into an ISA. The cash from their sale is placed in a "self select" ISA and it finances fresh shares or units - you can have a self select share ISA or a self select unit trust ISA.

Sue Concannon, head of share-dealing at the Halifax, warns: "It is important to know that with the sale of shares (or units) there may be a capital gains liability if you run over your £7,200 annual CGT allowance. Not very likely for most investors, but it would be silly to go for an ISA and incur capital gains, thus possibly wiping out the ISA tax break."

Sue Whitbread of Bath-based IFA Chartwell says those seeking a home for their newly ISA'd cash should go for ABN Amro's UK Growth ISA unit trust with its excellent management record and also HSBC's Income ISA, yielding about 3 per cent, but with capital potential too.

The Independent's columnist Brian Tora of stockbrokers Gerrard (formerly Greig Middleton and Capel-Cure Sharp) suggests quality "low risk" shares, like HSBC, Shell and GlaxoSmithKline. How much should you invest? "If you are investing £7,000 many people break it up into £1,000 lots," he says. Don't forget with internet dealing, costs are not high, though many people are happy investing £2,000-£3,000 per company, or a £5,000/£2,000 split.

On the whole people with unit trust ISAs stay with the provider that supplied the units, but it is easy to set up a self select unit trust ISA. The advantage is that you can mix and match funds from different providers. Contact fidelity.com, fundsdirect.co.uk, and egg.com who all offer self select ISAs.

Bear in mind that you have to stay with an ISA provider for a full tax year. So, if you have £5,000 with one provider and want to top it up with £2,000 in another unit trust stable later, you have to wait until the end of the tax year.

Doing it online

It makes sense to deal online, though you need to leave time for hiccups. Find your online dealer - there are plenty of them now including Charles Schwab, Barclays, DLJ Direct, E-Trade, Halifax ShareExpress, Hargeaves Lansdown Stockbrokers, Killik & Co, NatWest and Stocktrade. It is worth shopping around as they all have different charge structures and prices vary.

Next, if your shares still have certificates then you will have to "dematerialise" them - ie make them electronic. The dealer will send you a form and the process takes about a week. Then you sell the shares, on the Net, following instructions. If you want to buy new shares in the old companies, or fresh shares again, you do this on the Net via your select ISA. The "ISA provider" will administer the ISA, carry out instructions about buying and selling shares (you can use the telephone, too), administer dividends etc and charges an annual 1.5 per cent management fee.

What happens when you find an online broker's fees are inching up and you want to leave? Sue Concannon reassures: "It is easy to move share data from one broker to another. It costs £10 a company."