Capital Gains - What's the deal?

juststuff123

Hi all

The places I can put my cash for a decent rate are dwindling fast, my Nationwide Reg Saver has just matured and I've just found out they've stopped selling this product. I'll put some in Atom or similar but under 2.5% and I feel like it's not worth the effort.

Really the only option I have is Stocks & Shares, I've already maxed out my ISA for the year and I can open a pension and put some money in there but I don't want it all locked away for the next 20 yrs. So I'll have to invest money in regular taxable funds. Now for my question, can someone in layman's terms explain Capital Gains?

Many Thanks

eskbanker

The government stuff at https://www.gov.uk/capital-gains-tax seems fairly simple and clear to me - try that for size and come back with any questions!

Tom99

You buy shares for £x, later you sell those shares for £y.
Your capital gain is £y minus £x.
The 1st £12,000 capital gain in any tax year is tax free and the gain above £12,000 is taxed at either 10% of 20% depending on whether you are a higher rate taxpayer.
You also pay income tax on any dividends above £2,000 at 7.5% or 32.5%

PRAISETHESUN

https://www.gov.uk/capital-gains-tax

In a nutshell you pay tax only on any "gain" you make due to the difference in buying price and the selling price. For example, if you were to buy shares/property/whatever for £1000 and then you sell for £2,500, you have £1500 of gains (£2500-£1000=£1500) which you would then be taxed on. The tax is only due when you "dispose" of the assets (ie. the date you sell them determines which tax year they are taxed in) and there is some sort of personal allowance for under which it is tax freee (a combined limit, not per sale).

AnotherJoe

If you are unwilling to take the tax benefits of a pension, then I suggest this year you buy your investments outside an ISA, but next year transfer them to an ISA and forget putting more cash into ISAs. Unless you are putting substantial amounts into investments this year its unlikely you'd hit the £12,000 CGT limit anyway and then going forward your money would be exempt not just from CGT but also all other taxes and you will have one less annoying tax return form to complete.

juststuff123

Thanks guys,

In that case what's the tax that I've read about on here where you pay money on the difference between what a paid for a share / fund and it's value on a given date even if you don't sell? Or have i got that confused with something entirely different?

I may have to get Investing for dummies!

AnotherJoe

juststuff123 wrote: »

Thanks guys,

In that case what's the tax that I've read about on here where you pay money on the difference between what a paid for a share / fund and it's value on a given date even if you don't sell? Or have i got that confused with something entirely different?

I may have to get Investing for dummies!

CGT is only calculated on any gains after you've sold. Gains dont exist / are not taxable "on paper" whatever the theoretical value. So yes you've got confused with something else.

As a practical example I've got a lot of theoretical CGT wrapped up in some shares I own and am selling enough to be just under the £12k limit* each financial year. I've still got many times that "on paper" in the account - and of course they could crash and burn and then I'd regret not selling and paying the CGT earlier. You pays your money .....

* limit on gains not sales

Tom99

juststuff123 wrote: »

In that case what's the tax that I've read about on here where you pay money on the difference between what a paid for a share / fund and it's value on a given date even if you don't sell? Or have i got that confused with something entirely different?

There is no such tax.

juststuff123

Excellent - It will take a while to hit the £12k mark for selling so I'll worry about that when i get there, I'll probably manage it like AnotherJoe and as long as there aren't any other little surprises i think I'm good to go. I'll make sure I do Accumulation funds to keep interest / income under £1000 per year. so no tax owed their either.

Thanks Guys your all awesome!

eskbanker

juststuff123 wrote: »

I'll make sure I do Accumulation funds to keep interest / income under £1000 per year. so no tax owed their either.

You seem to be confusing at least two different concepts there!

The £1,000 threshold that I believe you're referring to is the personal savings allowance (for basic rate taxpayers), up to which you don't pay income tax on interest earned on savings.

Dividend income paid from investments is treated separately and has its own tax allowance (currently £2,000).

However, using Accumulation rather than Income variants doesn't shelter you from tax in the way you seem to be suggesting - dividend income is equally taxable from either, despite it being automatically reinvested in the Acc version.

JohnRo

juststuff123 wrote: »

I'll make sure I do Accumulation funds to keep interest / income under £1000 per year. so no tax owed their either.

ACC still pays a dividend, just internally.

Better to use INC funds for unwrapped investing which will make income much easier to record and calculate for tax purposes.

https://monevator.com/income-tax-on-accumulation-unit/