Hi Redbean, I'm not sure I can manage the whole investment process, but I can give you some ISA background, since I seem to be spamming the boards with my ISA knowledge recently (I haven't worked in Financial Services for a few years, so if anyone has any more recent experience I will defer to their knowledge :-))
OK, so, to start with the terminology.
An ISA is an Individual Savings Account, it is a tax efficient account, which means interest and capital growth earned on funds in an ISA is tax free. Dividends are taxed at 10%, but as I said elsewhere, that might have changed in the budget too, if it has, it has changed to reduce that 10%, but I'm too lazy to look it up.
ISAs have an annual limit. The tax year runs from 6th April to 5th April, usually shown as '14/15' for the tax year that starts in April 2014.
A Cash ISA is just as it sounds, an ISA that you hold cash in.
A S&S or Stock and Share ISA is one that you hold stocks and/or units in. You cannot transfer stocks into a S&S ISA, it is funded by paying cash into the account and then buying the stocks with that cash. The same goes for exiting the account, you have to sell the stocks and withdraw the cash proceeds.
Important: If you want to move funds from one ISA to another, you must not take the money out yourself, you must go to the new account provider and ask them to make a transfer request to the old provider. If you take the funds out, you lose the tax benefit, and it gets complicated.
Under the old scheme you could have one cash and one S&S per year, the total amount you subscribed across the two accounts could not exceed the maximum limit. In addition, you could not subscribe more than 50% of the limit to cash, although you could subscribe 100% of the limit to S&S if you wanted, or somewhere in between.
Rule changes as of this weekAfter the announcement this week, the new annual limit is £15000, and you will be able to have both Cash and S&S in one account, referred to as a New Isa (NISA). The rules around transferring from one ISA to another will stand, and it will depend upon your provider whether they convert your old ISA into a NISA. Obviously if you don't like the NISA that your old provider is offering you can transfer to a different provider.
However, the new rules don't take effect until July, to give the providers time to get themselves sorted out and work out how to convert to the NISAs (which is a pretty short timeline for the providers, I'm glad I'm not the one worrying about that any more!)
To answer your specific questions:
1) She cannot use her Cash ISA to buy shares, but she could, as you suggest, open a S&S and get them to transfer some or all of the £5k into the S&S to buy Vanguard. Be aware that not all ISA providers will let you buy Vanguard funds, so she needs to check that with the provider before opening the account. - She also needs to check what the providers management charges are, and that they accept monthly payments, some will only accept one payment a year "Lump sum".
Because of the rule change, she has two options right now: a) Open a S&S ISA, get the cash transferred over, and buy immediately, b) wait until July and see what her cash ISA provider is going to do about the NISA rules (ie will they convert her Cash ISA to a NISA?) If they do, it's less paper work for her to then use the £5k cash to buy. I would suggest that a) is a better option financially, because she's getting into the market sooner.
2) Yes, she could buy directly with Vanguard, but: Unless Vanguard offer an ISA - I don't think they do, but haven't checked for myself - the holdings won't benefit from the tax advantages of an ISA.
3) Aside from the ISA issue, hmm, I'm not sure, possibly none, but holding the funds in an ISA is a big benefit for the tax purposes. I would recommend she should only buy outside of an ISA if she has already reached the ISA limit for the year, but there may be other tax implications that I'm not aware of that affect your daughter.
I hope that helps.
www.monevator.com is a great resource for an introduction to UK investing.