Using ISAs to invest in investment trusts can provide valuable tax benefits. Investment trusts, also known as closed-end funds, are pooled investment vehicles that invest in a portfolio of assets. ISAs allow UK investors to shelter returns from capital gains tax and income tax. This article will explore key facts about combining investment trusts and ISAs.
Investment trusts have tax advantages in ISAs
Investment trusts are particularly well-suited for ISAs because they are exempt from capital gains tax on their investments. As the investment trust sells assets within its portfolio to realize gains, no capital gains tax is incurred. Holding an investment trust in an ISA compounds this benefit and means all capital gains are tax-free.
Many types of assets within investment trusts can benefit
Investment trusts hold a wide variety of asset types – including equities, bonds, real estate and alternative assets. Capital gains within an ISA shelter are not limited to only certain assets. This flexibility allows investors to gain broad exposure across many asset classes while accumulating tax-free gains.
Dividend income can grow tax-free
Many investment trusts focus on income generation through assets that pay dividends, such as dividend stocks. The dividend income paid out to investors from investment trusts held within an ISA does not incur any income tax. This allows dividend income to compound more quickly over time.
Annual ISA contribution limits allow tax savings
UK investors have an annual ISA allowance that allows them to contribute up to £20,000 per year tax-free. Savings held within an ISA accumulate without capital gains or dividend taxes applied. Contributing up to the annual limits each year to an investment trust ISA can lead to substantial tax savings over long periods of time.
Using ISAs to invest in investment trusts provides valuable tax advantages thanks to capital gains and dividend tax sheltering. Many types of assets within the trusts can benefit, allowing investors to tailor their exposure. Annual ISA contribution limits also lead to accumulating tax savings over time.