With a generous £20,000 annual limit to take advantage of, most of my stock market portfolio is sheltered in a Stocks and Shares ISA. Here are two reasons why.
Capital gains
First, I pay no capital gains tax on my ISA holdings.The general capital gains tax-free allowance is £12,300, but there are growing discussions about changing this. The ability to sell as many stocks as I like in an ISA without having to worry about payments tax is a huge plus, especially when I begin drawing from my equities in retirement.
I find my Stocks and Shares ISA particularly useful for investing in growth stocks, which have high potential for capital appreciation.
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One FTSE 250 growth stock on my watchlist is Softcat (LSE: SCT).
This IT infrastructure provider offers software licensing, security and cloud services to a range of public and private sector organisations. The Softcat share price is down 24% in 2022, but it looks oversold to me. After all, it has generated 66 consecutive quarters of year-on-year growth in gross invoiced income and profit.
I believe one reason for the sell-off is a global component shortage. This has translated into an order backlog for the group’s hardware division, affecting 30-40% of Softcat’s annual gross invoiced income. There are still no signs that this situation will improve.
Nonetheless, the business anticipates its full-year results will beat previous estimates. I see a particularly bright future for the firm’s service-based offerings and cybersecurity solutions. This is a rapidly growing market and Softcat is cementing its position as a leading player. I’d buy it today.
Dividends
The tax-free benefit I enjoy by investing in a Stocks and Shares ISA also extends to the treatment of dividends, which aren’t taxed either. The general annual dividend allowance outside of an ISA has been frozen at £2,000 for years and there’s a risk it could be scrapped one day.
I buy dividend stocks in my ISA with a view to building a substantial passive income portfolio.
One FTSE 100 dividend stock I’m looking at in July is DS Smith (LSE: SMDS).
The packaging multinational has a healthy 5.4% dividend yield. Granted, this can partly be explained by a 34% decline in the share price over 52 weeks, but I’m encouraged by the recent 24% dividend hike for the past year after the business substantially beat earnings expectations.
The stock faces inflation risks from rising energy costs. Despite this, it has combated challenges by passing on higher prices to customers. I believe it can continue as packaging represents a tiny fraction of the overall cost when a consumer makes an online purchase.
Strong US growth and a partnership with Amazon are also attractive features. I’d buy.
Compound earnings
The second reason I love investing in a Stocks and Shares ISA is to boost my compound earnings. I plan to keep my investments in my ISA for years while consistently reinvesting the dividends.
This effectively allows me to earn ‘interest on the interest’ on both my dividends and any appreciation in the value of my investments without adverse tax implications. Consequently, I view my ISA as an invaluable tool to build my wealth over time.
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.
