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Capital Gains = Unearned income? Help please.
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# 1
Young_Investor
Old 18-09-2012, 8:36 PM
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Default Capital Gains = Unearned income? Help please.

Hi everyone. I have been fairly successful in my investing activities in the last few years which has lead to a substancial amount of current/future capital gains. This is obviously great, however it has lead to an issue which I don't know how to deal with.

Are capital gains classed as unearned income like dividends and savings interest?

I ask this as I'm starting to pay back my student loan and don't know whether to add on any capital gain minus 9% (e.g. 10,000 cap gain means I'd add 900) on shares I've sold over the tax year to my student loan repayments (through a self assessment form).

I hope this is not the case as it feels that I'm being punished (in a strange way) for doing well and investing while young. Also, if I make 50,000+ in capital gains (possible) within this tax year, I could be landed with a 4500 student loan bill instead of being able to reinvest my capital.

Also, how are gains ('wins') on a spread bet classed? Is this unearned income?

Thanks for any help given.

Last edited by Young_Investor; 18-09-2012 at 8:40 PM.
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# 2
Young_Investor
Old 18-09-2012, 8:50 PM
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And by add on I mean add on to my salary which is over the student loan repayment limit threshold.

Last edited by Young_Investor; 18-09-2012 at 8:51 PM. Reason: spelling
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# 3
Linton
Old 18-09-2012, 9:21 PM
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I am not a tax lawyer but ...

Capital gains are not classed as income for tax purposes, they are taxed explicitly by Capital Gains Tax. What the criterion for student loans is I have no idea, but would have expected that if there was an interest in capital gains that would be explicitly stated in the forms.

Spread betting winnings for tax purposes are regarded as gambling rather than income and as such are tax free. In theory if you gain a substantial part of your annual income from spread betting you could be classified as a professional gambler. In which case your gambling income could be taxed. However I believe that there is no evidence that this has ever happened in practice.

I hope your realised capital gains are sheltered in S&S ISAs - otherwise you will be paying a significant amount of CGT. Note the word "realised". Notional gains arising from the increase in value of shares you continue to hold are not Capital Gains.

Last edited by Linton; 18-09-2012 at 9:23 PM.
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# 4
switch76
Old 18-09-2012, 9:22 PM
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In general capital gains are separate from income so I assume this would apply in your case.

Can I ask how much are you investing to get 50,000 capital gains in one year and how you did it?
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# 5
innovate
Old 18-09-2012, 9:50 PM
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I too think your student loan and your Capital Gains are unrelated - - - however.............

You'll get proper advice if you ring up the HMRC Capital Gains Tax guys, Unfortunately, only an 0845 number

Not much point trying to hide the facts from the taxman - - they'll not be very forgiving when (not "if") they find out you have been trying to skimp on any tax due.

Anyway, be proud you are in a position to pay a little more tax!
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# 6
Young_Investor
Old 18-09-2012, 9:53 PM
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Thanks for the info Linton. I have already reserached spread betting classed as gambling and have around half my portfolio in spread bets (unleveraged) in an attempt to lower my potential tax bill back to the pre con/dem cap gains tax hike from 18% flat to the current 18-28% (very unfair and unjust imo). If needs be I'll have to ask the student loans company or just declare it on my self assessment forms and see if they ask for money!

Most of my current unrealised (may soon be realised) capital gains (around the 45,000 mark currently) are all in non-isaable shares (i.e AIM without a second 'main' listing).

Switch, my current capital gains issue comes from money made this year as well as some 'unrealised' gains from previous years which have rolled over to this tax year, where they may become 'realised'. I started with around 10,000 in savings 5 years ago (worked full time for a year and pretty much saved all money and had some given to me by my grandad at 18).

The way I invest is fairly risky, as I feel I can afford to take risks while young. I use a set of personal rules in select companies and build my own NAV's to help me with my decisions to invest/sell. I mainly invest in AIM or FTSE 250 companies. The only FTSE100 companies I've ever invested in are Vodafone and Tullow Oil (brought at 490p and sold at 1250p within a year). I had the fortune/insight (picked it according to my rules from many other potential companies to put my 'very high risk' allocation of money into) to invest and importantly HOLD (most anyway) a small initial amount in gkp from 14p to 252p (as of today). The holding part is the key here.
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# 7
innovate
Old 18-09-2012, 9:57 PM
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As an afterthought, why are you worried about paying off 4,500 from loan if you make 50K capital gains? Probably costs you more worrying about the loan than just paying it off and move on.
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# 8
Young_Investor
Old 18-09-2012, 9:58 PM
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Think I may do that innovate, thanks. Also, you are very correct that I'm lucky to be in the situation to pay tax. I just don't want to have to pay off my student loan faster than I have to though, as with inflation around 3% on average and my student loan interest at 1.5%, my loan currently effectively being devalued in 'real' terms!

The reason why I don't want to pay 4500 off my loan is for the above reason and that I would prefer to use the 4500 as capital reinvestment or as part of a deposit for a house, thus saving me a lot more money over time then paying off my devaluing student loan will. If the rules say otherwise then they're the rules and I just have to live with it and realise I'm lucky to be paying a nice chunk off early.

Last edited by Young_Investor; 18-09-2012 at 10:04 PM.
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# 9
Young_Investor
Old 18-09-2012, 10:09 PM
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Just had a thought. If a young couple sell their house/flat at a gain (unlikely atm I know, but the concept is still valid), would they have to declare the gain as income to pay 9% of it on thier student loans?

That seems like an unlikely situation, but it should be the same rules for property cap gains as it is for shares.

I've just realised you don't get taxed on your first homes capital gains. Only 2nd/investment homes.

Last edited by Young_Investor; 18-09-2012 at 10:12 PM.
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# 10
switch76
Old 18-09-2012, 10:14 PM
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I don't think you pay CGT on your primary residence.

If you can turn 10,000 into 55,000 in 5 years I wouldn't worry too much about your student loan.
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# 11
grey gym sock
Old 18-09-2012, 10:55 PM
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http://www.hmrc.gov.uk/leaflets/csl1.pdf
this HMRC leaflet doesn't say anything about capital gains affecting student loan repayments, which should mean they don't ... it does say that unearned income counts if it's more than 2,000 ... but that should mean taxable unearned income, not capital gains or untaxed "gambling" winnings.
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# 12
Young_Investor
Old 18-09-2012, 11:26 PM
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Thanks grey gym sock. The definition of unearned income seems to be the problem. I've just read in a Student Loans Company booklet an example which has you repaying based on your salary plus 9% of unearned income from stocks and shares. The term stocks and shares isn't too helpful as that could mean dividends (definate unearned income) or capital gains and dividends.

Still a little confused. I may ring them up, however, I reckon I'll just speak to people who don't have a clue what I'm on about! lol
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# 13
jimjames
Old 18-09-2012, 11:32 PM
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CGT is only payable when you sell and is the profit over 10k so split the sales over different tax years and you can avoid paying it at all.

Better still have the shares in an ISA to keep them tax free
Remember the saying: if it looks too good to be true it almost certainly is.
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# 14
innovate
Old 18-09-2012, 11:35 PM
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Really sorry, guys, you lost me there. You are loaded, and you'd be able to gain a couple of pounds from not paying back a student loan a tad faster than you have to.

So why don't you just go ahead and make your couple of pounds?
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# 15
Young_Investor
Old 18-09-2012, 11:38 PM
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jimjames, thanks for the advice, but I already understand to CGT standard rules. I would do that, however, if I need a large chunk of money for a deposit then I can't do that. Also, if a takeover occurs I also won't be able to do that. I used last years CGT allowance to move gains in spread bets (safer then bed and breakfasting them as I'd be out the market for 30 days and they're tax free from now on). At the moment I'm just planning for future problems.
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# 16
Young_Investor
Old 18-09-2012, 11:50 PM
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innovate, I know it sounds fairly petty, but the way I have made the amount I have today is by capital reinvestment and not wasting money when I don't have too. For example, if I don't have to pay 4500 into my loan I could use that money again to invest further and perhaps turn it into 10,000. Thus losing a hypothetical 5500. It's called opportunity cost.

However, if the rules say I have to pay it, I will pay it and feel happy about having less debt. It's just a student loan is the cheapest form of debt you can possibly get because it's normally only linked to inflation (and currently below inflation as the interest rate can't be more then 1% above the BoE base rate, currently at 0.5%). Logic dictates that I'll try to pay this debt with the smallest amount I can legally get away with.

Last edited by Young_Investor; 18-09-2012 at 11:52 PM.
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# 17
innovate
Old 19-09-2012, 12:16 AM
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Yeah, Young_Investor, I understand there is a lot of value in cheap money. If you are convinced you can make 5.5K in a year from the 4.5K student loan, you would of course be stupid to repay the 4.5K anytime soon.

Though this sort of gain is most likely accidental, rather than likely, to achieve.This is not to say that some lucky B8stard couldn't consistently outperform the market by a million miles............

Good luck to you, don't forget you appeared on MSE at some stage in your career.....
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