Working out Tax Due on Investment

skipfeeney

Hi All,
I am wanting to setup some investments accounts for each child to contribute to go to university.  
I am really not keen on a Junior ISA, for a few reasons really.  I can't also create an ISA in my own name for them as I have my own investments. 
What i am struggling to work out is if I just open a regular investment account for each child (4 of them) on Best invest / HL how much tax would I pay on any profits?
So lets say I put in £5000 now, then put in £1000 a year for 15 years.  When they are 18, lets say there is £30,000 in there.  So i have made £10k return and I withdraw the lot how much tax would be due either for a 20% or a 40% tax payer?  I am not sure how the personal savings allowance would work in this instance either?

Thanks

[Deleted User]

Your question is somewhat ambiguous..  When you say 'investment account', do you mean a savings account.  Also, you say that you want to open investments account for each child and then you say you put £1000 a year for 15 years.  Is that per child? 

If we assume that you mean a savings account because you make reference to personal savings allowance, then I think you misunderstand how tax on savings is worked out.  You will not pay tax on the interest you receive at the end of the 15 years.  Tax on interest is paid when you receive the interest, so if for instance, in the first year you receive £1000, then this is taxable at your relevant tax rate in that year. However, for each year, you can have an additional allowance of upto £5000, plus the £1000 or £500 PSA depending whether you are a basic rate tax payer or higher paid.  How much tax you will pay depends on your non savings income.

eskbanker

OP will doubtless clarify but my interpretation of the reference to Best Invest and HL is that it is genuine investment rather than savings, and so the personal savings allowance doesn't apply in any form in this scenario.

The relevant taxation is Capital Gains Tax on the gain between purchase and sale, so £10K in this case, if investing £20K and selling at £30K.  There is an annual CGT exemption (currently £12K) so if selling each of these pots in four separate tax years (while making minimal other taxable gains) then there should be no CGT payable, but if crystallised gains in any tax year exceed that threshold then expect to pay some tax, at the applicable rate(s) from https://www.gov.uk/capital-gains-tax/rates.

skipfeeney

eskbanker said:

OP will doubtless clarify but my interpretation of the reference to Best Invest and HL is that it is genuine investment rather than savings, and so the personal savings allowance doesn't apply in any form in this scenario.

The relevant taxation is Capital Gains Tax on the gain between purchase and sale, so £10K in this case, if investing £20K and selling at £30K.  There is an annual CGT exemption (currently £12K) so if selling each of these pots in four separate tax years (while making minimal other taxable gains) then there should be no CGT payable, but if crystallised gains in any tax year exceed that threshold then expect to pay some tax, at the applicable rate(s) from https://www.gov.uk/capital-gains-tax/rates.

Hi - yes that's correct, its an investment account not savings.  I would be cashing each pot in different years for when each child is 18.    Thanks for the info, based on that assumption its highly unlikely I would have a gain of more than 12k in a year.  So in that case - no tax would be payable? Is that correct?  If there was more than 12k, could i split it over two years?

What I am trying to work out is whether its worth taking out a Junior ISA or not.  If there is no tax to pay then there are no benefits for me so I feel its best to keep it out of a Junior ISA so I can retain more control and flexibility.

eskbanker

There'd be no Capital Gains Tax payable if you're in a position to stage the sales in such a way that each tax year's crystallised gains (including proceeds from any other disposals of unwrapped investments) don't exceed that year's CGT threshold.

One other tax matter is that of dividends during the term(s) of the investments - if you ultimately build up £120K (even if not all held concurrently) then at some point you're likely to earn enough dividend income to exceed your annual dividend allowance (currently £2K), so there's likely to be some income tax payable in years where you breach that.

Also, do you have a partner, with whom you can double these allowances?