Taxation of S&S

stphnstevey

I am just looking into this but would appreciate any pointers?

I believe any gain is treated as a Capital Gain and Dividends under the Income Tax rules for dividends

sovsov1357

Have you used your ISA allowance at all?

Dazed_and_confused

I believe any gain is treated as a Capital Gain

Assuming you are referring to buying and selling shares then a gain is only taxable if it is realised. Just because shares have increased in value doesn't mean there is a tax liability.

stphnstevey

Can I check some figures?

If CGT allowance is £11,700 and assuming a 8% return (is that reasonable?) on investments not in a tax wrapper

Then if able to in some way bed and breakfast (spouse/ISA/buy similar alternative)

£11,700/8% = £146,250

So approx £150k of investments could receive a 8% CG per year without having to pay any CGT?

cloud_dog

stphnstevey wrote: »

Can I check some figures?

If CGT allowance is £11,700 and assuming a 8% return (is that reasonable?) on investments not in a tax wrapper

Then if able to in some way bed and breakfast (spouse/ISA/buy similar alternative)

£11,700/8% = £146,250

So approx £150k of investments could receive a 8% CG per year without having to pay any CGT?

Not exactly.

The £11700 (or 8% in your example) relates to the profit / gain made when you sell / realise.

So if your investment of £146250 actually cost you £100k to buy originally, you only have £46250 profit. So the £11700 would count against the £46250 element and not the whole.

CGT is based on the gain realised when you sell. ((Sell price - buy price)*shares sold)-£11700
Anything above this will be taxed.

stphnstevey

cloud_dog wrote: »

Not exactly.

The £11700 (or 8% in your example) relates to the profit / gain made when you sell / realise.

So if your investment of £146250 actually cost you £100k to buy originally, you only have £46250 profit. So the £11700 would count against the £46250 element and not the whole.

CGT is based on the gain realised when you sell. ((Sell price - buy price)*shares sold)-£11700
Anything above this will be taxed.

Thanks, but I had stated if the gain was 8%, not £46250

You could use any figures you like, but I was trying to work it back to a rough estimate of the size of investment that could be free from CGT under the allowances, with some basic assumptions to be able to do so

ValiantSon

stphnstevey wrote: »

Thanks, but I had stated if the gain was 8%, not £46250

You could use any figures you like, but I was trying to work it back to a rough estimate of the size of investment that could be free from CGT under the allowances, with some basic assumptions to be able to do so

You can't realistically work out what the initial value of the investment would be to avoid paying CGT when you sell. Nobody knows what the value will be when you come to sell. It could be an 8% annual return, or it could be 3%, or 14% or.....

It also depends upon how long you have held the investment.

This is just guesswork and ultimately pointless. If you have used up your ISA allowance and still have money that you want to invest then do so. You can always sell shares in batches to avoid CGT, and set losses off against gains, but ultimately if you have to pay the tax then you have to pay it. You only have to pay it because you have made money!

bowlhead99

What cloud_dog said, i.e. you only get the gain for tax purposes *if and when* you sell. And you won't realistically get a stable 8% return neatly each year, though you can of course create a gain whenever you like by selling something for more than you paid, regardless of the time of year.

But another way to look at it is: say you invested £150k in investment funds, and didn't take any particular action when setting up the portfolio to ensure the underlying companies in which the funds were invested were companies that never paid out any dividend. Which is normal, because most sane people wouldn't want to skew their portfolio like that towards companies that don't want to pay, or can't afford to pay, any dividends.

...then when you grow your overall investment portfolio from £150k over the course of the year by 8% to £162k of value, that £12k of value generated isn't going to be all growth in valuation. Some of it will be dividends, which you might either choose to reinvest or spend. So perhaps it's 2% (£3k) of dividends and £9k of the portfolio going up in value to more than you've paid.

In that situation you would have £3k taxable under the income tax rules for dividends and the rest of the investment funds are worth £159k, or £9k more than you paid.

If you want to "cash in" the gain and make the most use of your annual gains exemption, you would have to sell the *whole* portfolio for £159k, making a gain of £9k on what you'd paid to buy it. Then if you wanted, you could buy something else which is legally a totally different asset (but could be substantially similar in nature) using your £159k of cash (or £162k assuming you didn't spend the dividends when received).

If you only sold a portion of the portfolio (say a third of it) when you got to the end of the tax year, and didn't sell the other two thirds, you'd only realise a third of the potential gain you made and the rest would carry on unrealised with no disposal for tax purposes that year, and more to fit into future allowances. So you'd just be selling (say) £53k worth of assets that you'd bought for £50k, and only a £3k gain, with more gains the next year or the year after or the year after, whenever you sell those particular shares that didn't get sold.

Selling and rebuying your whole portfolio every time it looks like it's getting big, to create those taxable gains on purpose, is a nice idea in theory. In practice you won't get a nice smooth 8% a year - maybe you'll have a very quick gain and other years a lot less.

stphnstevey

I remember dividends and CGT form the top slice of income, is there an order of taxation eg salary, savings, dividends, CG etc?

How do they fit in with each other and where do the allowances fit in?

It seems personal pension contributions can help in increasing your tax band for both income and capital gains

cloud_dog

stphnstevey wrote: »

I remember dividends and CGT form the top slice of income, is there an order of taxation eg salary, savings, dividends, CG etc?

How do they fit in with each other and where do the allowances fit in?

It seems personal pension contributions can help in increasing your tax band for both income and capital gains

Hi.... You still appear slightly confussed or are confusing a relationship between income and CGT. There is no relationship. Both (in fact all)having their own allowances, with income taxation having multiple levels.

Most (not all) allowances/taxation is a use it or lose it option each FY.

Re CGT, the way to reduce the impact is to hold investments in ISAs (or pensions but see income tax), use tax efficient investment vehicles like VCT or EIS (this not my field of knowledge), or to keenly manage investments liable for CGT by utilising the CGT allowance each FY.

Re income, making pension contributions will reduce your income tax liability, dividends are sheltered for the first £1k (2018/2019), and savings interest is sheltered for the first £1k for LRT and £500 for HRT.

stphnstevey

cloud_dog wrote: »

Hi.... You still appear slightly confussed or are confusing a relationship between income and CGT. There is no relationship. Both (in fact all)having their own allowances, with income taxation having multiple levels.

Most (not all) allowances/taxation is a use it or lose it option each FY.

Re CGT, the way to reduce the impact is to hold investments in ISAs (or pensions but see income tax), use tax efficient investment vehicles like VCT or EIS (this not my field of knowledge), or to keenly manage investments liable for CGT by utilising the CGT allowance each FY.

Re income, making pension contributions will reduce your income tax liability, dividends are sheltered for the first £1k (2018/2019), and savings interest is sheltered for the first £1k for LRT and £500 for HRT.

No confusion. Pensions also have an effect on tax banding for CGT
http://www.cii.co.uk/knowledge/personal-finance/articles/reducing-income-tax-and-capital-gains-tax-with-the-help-of-pension-contributions/43849