Tax credits and 'chargeable events'

That's a really good question - I'd never thought about it before.

I think the answer is that you don't count capital gains at all in the income calculation.

There are two rules of thumb:
1. The TC income rules generally follow the income tax rules. As capital gains are not subject to income tax, then they shouldn't count as income for TCs.

2. By realising a capital gain, you are only changing one type of asset (shares etc) for another (cash). That would imply that the proceeds are not income either.

But I'm struggling to find anything that explicitly backs this up.

The TC600 notes say (on p40):

We will not normally take capital into account when we work out your tax credits. By capital we mean deposits in current and savings accounts at banks and building societies, many lump sum payments, the value of property, shares and other investments.

I think "lumps sums" could cover capital gains.

Furthermore the income regulations don't mention capital gains anywhere (implying that they don't count as income).

There are some definite exceptions to this. Things like stock dividends count as income, and there is what's called 'notional income'. So if you structure your return from an asset as a capital gain rather than a dividend solely to increase your TCs, then you have to count it as income anyway. But most people don't have that type of control over their returns - unless you own shares in your own business - and anyway, even if you did do this, you would often be able to construct another plausible reason for doing it that HMRC wouldn't be able to argue against.

Finally, if you are buying and selling physical assets solely to make a profit, it would count as trading anyway and would come under the 'trading income' rules for both income tax and tax credits.

But on regular capital gains that most people get on their personal investments, then I don't think it would impact directly on the amount of tax credits you are entitled to (of course, you have to declare dividends and interest from your investments).

Does anyone have a differing interpretation or knows for sure?

irs

Yes, I saw that. But that's specifically talking about life insurance policies, which have their own tax regime, completely separate from the normal Capital Gains regime. So I don't think it's relevant to what you're asking.

While the capital gains regime interacts with the income tax regime, as you say, it is dealt with by separate legislation (the CGTA I think). So if you were to bring capital gains into the income calculation for TCs, the TC income regulations would have to refer to the CGTA (to take account of the taper relief rules, which would also apply), which they don't.

I know from past experience that HMRC are normally meticulous about making the distinction between income and capital. If it turns out that capital is included as income, then the legislation is drafted extremely sloppily.

irs