How is tax calculated on investment profit not in an ISA?

DennisTenus

Just wondering really, because it can obviously go up and down, what happens if it goes down at the end of the tax year so do they work out the tax on the profit/increase then but after that it could go back up again?

Or do they somehow average it across the year?

ColdIron

Which tax?

• Capital gains only arise when you sell, don't sell don't get taxed
• Dividends have nothing to do with share or unit price, just the dividend paid

DennisTenus

Ok, so for example, I had funds in a non ISA account, there would be no tax on the increase/profit until I sold them?

Also let's say I had LTGE fund, which is income fund, so when I get the income do I get taxed on that then? is that what you meant by the dividend?

bowlhead99

You don't pay tax on assets that you own just because you bought something and it happens to be now worth more than you paid for it, or less than you paid for it.

There are two basic taxes:

Capital gains tax: due on capital gains net of losses; a gain is the amount by which the sales proceeds you get when selling something (e.g. a share or a pile of investment fund units) exceeds the costs of buying it/them. A loss is the opposite.. Subject to annual exemption for the first £x of net gains.

Income tax: due on interest or dividends or property income or other income received from your investments. Again you have allowances or special low tax rates for some of these.

There is no tax levied if you buy something for £1000 and next week it's worth £1200 and at tax year end it's worth £1250 and next tax year end it's worth £1100 etc etc but you never actually sell it and it never earns you any income. Because you haven't made any capital gains or losses if you haven't actually sold it for a price different to what you paid to buy it.

The tricky bit is if you're using open ended investment funds of the 'accumulation' variety. In that type of fund (the opposite of an 'income' or 'distribution' version), the fund earns income throughout the year but never actually sends it to you as a dividend, just internally reinvests it. In that case you still have to see what the income was on your statement, and treat it as a piece of income and an additional cost of investment, even if no cash changed hands on the 'distribution date'.

DennisTenus wrote: »

Ok, so for example, I had funds in a non ISA account, there would be no tax on the increase/profit until I sold them?

There is no tax on capital gains if you haven't actually sold them to make a gain and are just watching the value of something you own, move up and down. Daily or annual movements in market value aren't taxable events.

Also let's say I had LTGE fund, which is income fund, so when I get the income do I get taxed on that then? is that what you meant by the dividend?

Yes it is subject to income tax, but you might not actually have any income tax to pay if it's within your dividend allowance or your normal annual personal income tax allowance.

ColdIron

DennisTenus wrote: »

Ok, so for example, I had funds in a non ISA account, there would be no tax on the increase/profit until I sold them?

Also let's say I had LTGE fund, which is income fund, so when I get the income do I get taxed on that then? is that what you meant by the dividend?

Basically yes to both but there are 'allowances' for each so you may not actually pay any tax

https://www.gov.uk/guidance/capital-gains-tax-rates-and-allowances
https://www.gov.uk/tax-on-dividends

reeac

Related to this thread can I pose the following: we have shares which we have held for about 20 years and gradually converted them all to dividend reinvestment. We have, in the past few years, been Bed and ISAing them which makes us potentially liable for CGT but how, given the varying durations of ownership of these shares does one calculate the CG and is that CG attributable only to the tax year in which the Bed and ISA is carried out?

eskbanker

reeac wrote: »

Related to this thread can I pose the following: we have shares which we have held for about 20 years and gradually converted them all to dividend reinvestment. We have, in the past few years, been Bed and ISAing them which makes us potentially liable for CGT but how, given the varying durations of ownership of these shares does one calculate the CG and is that CG attributable only to the tax year in which the Bed and ISA is carried out?

Yes to the latter, i.e. CGT liability is calculated at the point of carrying out the Bed & ISA, and once the shares are inside an ISA there's no need to consider CGT (or income tax on dividends) anymore.

ColdIron

reeac wrote: »

We have, in the past few years, been Bed and ISAing them which makes us potentially liable for CGT but how, given the varying durations of ownership of these shares does one calculate the CG

Broadly you add up the number of shares and the costs to establish an average value per share

https://www.gov.uk/government/publications/shares-and-capital-gains-tax-hs284-self-assessment-helpsheet/hs-shares-and-capital-gains-tax-2015#why-are-special-rules-needed

Reed_Richards

reeac wrote: »

We have, in the past few years, been Bed and ISAing them which makes us potentially liable for CGT

The onus is on you to report any CGT liability to HMRC before they find out and come after you for tax evasion. Therefore it's a bit late to ask how you make the calculation! You would report capital gains as part of your Self Assessment tax return and so might need to register for Self Assessment if you are not already registered. If you sold £20,000 worth of shares in order to make the full ISA contribution you might have exceeded the annual CGT allowance of about £11,000 (the exact figure depends on the tax year).

reeac

Firstly I realise that once in the ISA then the investment is CGT free .....that's one reason why we are making that move.
Secondly, since the tax free allowance for 2018/9 is £11,700 then I have that much headroom which is good given the upper limit for Bed and ISA of £20,000 per person per annum. Nevertheless I need to calculate the CG resulting from the Bed and ISA process ....that's why I asked those questions. Do people agree that using weighted average purchase prices for the shares is appropriate?

talexuser

Presumably you have been declaring the dividends as they came in since they would be liable to income tax.

When you sell to bed and isa, add up the total number of particular company shares, and add up the cost of each bunch of shares to get a total buy cost for all the shares, then add up all the dealing costs of obtaining all the shares, including stamp duty. Now divide the total cost, by the total number of shares to get the average cost of obtaining the shares and deduct the dealing costs. This is your buy cost. Take this away from your sell cost (minus dealing cost) to get the capital gain - positive for gain, negative for loss.

In 18/19 you could make a gain of £11700 without paying tax. Above this gain level tax is 10% in basic rate and 20% in higher rate.

With the above calculation you can sell just enough to gain the allowance every tax year to avoid getting into tax.

No of shares to sell = allowance (£11700 this tax year) / (current price-buy price)

where buy price is the average as above and dealing costs are subtracted.