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One effective way British investors reduce their tax liabilities is by making full use of a Stocks and Shares ISA. This handy tax wrapper allows the account holder to invest up to £20,000 per year with no capital gains tax charged on the returns.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
However, that doesn’t mean it’s all plain sailing. Those new to investing should be aware of some common mistakes that often catch the unsuspecting by surprise.
Remember to diversify
It’s not necessary to buy every stock on the FTSE 100, but too few is equally as bad. A general rule of thumb suggests between 10 and 20 stocks from various industries. For example, some retail stocks, one or two bank stocks, a promising tech stock, and a few utilities and energy stocks.
Various share types are also advisable, such as growth, income, or defensive. By mixing different types of shares from various industries, a portfolio is better protected from any single point of failure.
Avoid hidden costs
Reducing one’s tax obligations is just one part of optimising returns. There may be other small costs and charges that aren’t immediately obvious. For example, a 0.5% stamp duty is levied on all share purchases. This may sound like a negligible amount but it all adds up over time.
It’s best to formulate a long-term strategy from day one to reduce the likelihood of frequent buying and selling. This ensures that unnecessary transactions – and their associated costs – are kept to a minimum. After all, buying and holding shares for the long term is considered one of the most effective ways to grow wealth.
Compound through dividend reinvestment
Dividend-paying stocks are a great way to build up a portfolio passively. But not all dividend stocks pay out in shares (accumulating) — some pay out cash (distributing). To ensure this cash doesn’t just gather dust in your account, it’s best to adopt a dividend reinvestment program (DRIP). This way, all dividends go back into the investment and it snowballs in size through the miracle of compounding returns.
A stock to consider
London Stock Exchange Group (LSE: LSEG) is not exactly an exciting stock that makes frequent headlines. But this boring stability is exactly why it may be worth considering for a first-time ISA. It’s up 342% in the past decade, equating to an annualised return of 16% per year.
The company is also a solid and reliable dividend payer, with 15 years of consecutive growth under its belt. The 1.2% yield may be small but dividends have increased at an average rate of 13.8% per year.
Aside from managing the London Stock Exchange (LSE), the group’s 2021 acquisition of Refinitiv generates revenue from a subscription-based data analytics service. This is further supported by a 10-year deal with Microsoft to accelerate AI and cloud‑driven innovation.
However, all this rapid expansion brings about operational complexity and risks losses if the assets underperform. Jurisdictional regulations are another risk factor, along with foreign exchange exposure and competition from the likes of Bloomberg.
Risks aside, the stock remains attractive due to its blend of growth, tech‑led transformation, and defensive traits — an ideal mix for a beginner’s tax‐efficient ISA.
