Taxes in the UK on investing in stocks

premiumz

Hi,

I have a couple questions regarding getting taxed on profits in the UK through selling shares.

Firstly, when you sell a share in a company and use that same money to buy another share in another company, you are liable to taxes because you sold the share and therefore it becomes taxable right? Or do you only get taxed once you have withdrawn from your account to your bank account? I believe you get taxed regardless of withdrawing but I just wanted to clear that up?

Secondly, Let's say we are already a higher rate tax payer. When investing in stocks, if we hypothetically invested £100,000 and that £100,000 grew to £500,000 and we wanted to sell all of our shares and use the money for something unrelated to stocks.
We would need to pay capital gains tax on £400,000 profit. Which is 20%. (£80,000). We would then need to pay 45% income tax on £320,000 (£144,000) leaving us with £176,000 after taxes.
Is that correct? That works out to be around 56% paid in taxes.

Mental paying the government more than half of the profit. I'm hoping I've messed up in my calculations and someone can correct me on it.

Thanks

Linton

Firstly: The relevent tax is Capital Gains Tax (CGT) which is based on the gain you made over what you bought the share for.  What you do with the money from selling is irrelevent.

Secondly: You are wrong - you dont pay CGT as well as income tax on the same money.  If it's capital gains it's not income and Vice versa.  I dont know the details of how it works because I have never paid capital gains tax in my life, but I believe the mnaximum CGT rate on investments is 20% which is only payable if you are a higher rate income tax payer. Look at: https://www.gov.uk/capital-gains-tax/rates

If someone did what you envisage they would be highly taxed, but then they would probably be rather stupid.  CGT on investments is one of the easiest taxes to avoid by proper planning , making maximum use of the  CGT tax free allowance and maximum use of legal tax avoidance such as ISAs.

As to it being "mental" - I find it difficult to justify someone making a living from investments paying less tax than someone earning the same amount.

Audaxer

premiumz said:

Secondly, Let's say we are already a higher rate tax payer. When investing in stocks, if we hypothetically invested £100,000 and that £100,000 grew to £500,000 and we wanted to sell all of our shares and use the money for something unrelated to stocks.

We would need to pay capital gains tax on £400,000 profit. Which is 20%. (£80,000). We would then need to pay 45% income tax on £320,000 (£144,000) leaving us with £176,000 after taxes.
Is that correct? That works out to be around 56% paid in taxes.

If that £100,000 was invested in an S&S ISA over 5 years and it grew to £500,000 you wouldn't have to pay any tax on the £400,000 profit.  So unless you have already used up all ISA allowances, or have a significant sums to invest straight away you should be able to make profits without paying any tax.

premiumz

Linton said:

Firstly: The relevent tax is Capital Gains Tax (CGT) which is based on the gain you made over what you bought the share for.  What you do with the money from selling is irrelevent.

Secondly: You are wrong - you dont pay CGT as well as income tax on the same money.  If it's capital gains it's not income and Vice versa.  I dont know the details of how it works because I have never paid capital gains tax in my life, but I believe the mnaximum CGT rate on investments is 20% which is only payable if you are a higher rate income tax payer. Look at: https://www.gov.uk/capital-gains-tax/rates

If someone did what you envisage they would be highly taxed, but then they would probably be rather stupid.  CGT on investments is one of the easiest taxes to avoid by proper planning , making maximum use of the  CGT tax free allowance and maximum use of legal tax avoidance such as ISAs.

As to it being "mental" - I find it difficult to justify someone making a living from investments paying less tax than someone earning the same amount.

Hi Linton,
Thanks for the response!
On the first question. I did say I thought you would be liable for tax once you sold the share. That's what I thought might be the case. However, what confused me was, do I pay that tax only once I have officially withdrawn the money from the brokerage to my bank account or do I pay it regardless of taking money out of the investment account. I assumed it would be that you pay it regardless. I just wanted someone to clarify this.

Secondly, It was a question, not a statement. I am simply asking, if both applied. Usually when paying CGT you would do through a LTD company. This is why it was confusing to me as to why people talk about CGT when investing in stocks as opposed to just regular income tax. So you're saying only CGT applies. So I can take the hypothetical £400,000 profit out of the brokerage account and pay 20% CGT and that's it? No income tax. (I understand there are tax benefits of using ISA and allowances etc.)

With regards to my "mental" comment. It was referring to if 56% was the correct calculation. Not if someone paid less tax through investments vs someone working a 9-5 paying more. Come on.

premiumz

Audaxer said:

premiumz said:

Secondly, Let's say we are already a higher rate tax payer. When investing in stocks, if we hypothetically invested £100,000 and that £100,000 grew to £500,000 and we wanted to sell all of our shares and use the money for something unrelated to stocks.

We would need to pay capital gains tax on £400,000 profit. Which is 20%. (£80,000). We would then need to pay 45% income tax on £320,000 (£144,000) leaving us with £176,000 after taxes.
Is that correct? That works out to be around 56% paid in taxes.

If that £100,000 was invested in an S&S ISA over 5 years and it grew to £500,000 you wouldn't have to pay any tax on the £400,000 profit.  So unless you have already used up all ISA allowances, or have a significant sums to invest straight away you should be able to make profits without paying any tax.

Appreciate the response. I think you're only allowed to invest £20,000 per year with an ISA? So for example, it would take 5 years just to get the £100,000 into the ISA accounts right?

Anyway, what are your thoughts on my original questions?

Thanks

Linton

premiumz said:

Linton said:

Firstly: The relevent tax is Capital Gains Tax (CGT) which is based on the gain you made over what you bought the share for.  What you do with the money from selling is irrelevent.

Secondly: You are wrong - you dont pay CGT as well as income tax on the same money.  If it's capital gains it's not income and Vice versa.  I dont know the details of how it works because I have never paid capital gains tax in my life, but I believe the mnaximum CGT rate on investments is 20% which is only payable if you are a higher rate income tax payer. Look at: https://www.gov.uk/capital-gains-tax/rates

If someone did what you envisage they would be highly taxed, but then they would probably be rather stupid.  CGT on investments is one of the easiest taxes to avoid by proper planning , making maximum use of the  CGT tax free allowance and maximum use of legal tax avoidance such as ISAs.

As to it being "mental" - I find it difficult to justify someone making a living from investments paying less tax than someone earning the same amount.

Hi Linton,
Thanks for the response!
On the first question. I did say I thought you would be liable for tax once you sold the share. That's what I thought might be the case. However, what confused me was, do I pay that tax only once I have officially withdrawn the money from the brokerage to my bank account or do I pay it regardless of taking money out of the investment account. I assumed it would be that you pay it regardless. I just wanted someone to clarify this.

Secondly, It was a question, not a statement. I am simply asking, if both applied. Usually when paying CGT you would do through a LTD company. This is why it was confusing to me as to why people talk about CGT when investing in stocks as opposed to just regular income tax. So you're saying only CGT applies. So I can take the hypothetical £400,000 profit out of the brokerage account and pay 20% CGT and that's it? No income tax. (I understand there are tax benefits of using ISA and allowances etc.)

With regards to my "mental" comment. It was referring to if 56% was the correct calculation. Not if someone paid less tax through investments vs someone working a 9-5 paying more. Come on.

First question: Happy to oblige.
Seondly:  CGT is the only tax that applies and I believe would either be 10% or 20% of your gain above the current allowance of £12300 depending on whether you were a basic or higher rate income tax payer.
"Mental" - actually people with income are charged at twice the % (or more for very high earners)  that is charged on CGT.  That could be called "mental".

ColdIron

premiumz said:

Audaxer said:

premiumz said:

Secondly, Let's say we are already a higher rate tax payer. When investing in stocks, if we hypothetically invested £100,000 and that £100,000 grew to £500,000 and we wanted to sell all of our shares and use the money for something unrelated to stocks.

We would need to pay capital gains tax on £400,000 profit. Which is 20%. (£80,000). We would then need to pay 45% income tax on £320,000 (£144,000) leaving us with £176,000 after taxes.
Is that correct? That works out to be around 56% paid in taxes.

If that £100,000 was invested in an S&S ISA over 5 years and it grew to £500,000 you wouldn't have to pay any tax on the £400,000 profit.  So unless you have already used up all ISA allowances, or have a significant sums to invest straight away you should be able to make profits without paying any tax.

Appreciate the response. I think you're only allowed to invest £20,000 per year with an ISA? So for example, it would take 5 years just to get the £100,000 into the ISA accounts right?

Yes but you can also put up to £40,000 into a pension so 2 years and job done. As a higher rate taxpayer you may be able to use carry forward. If you have a spouse you can put 2 * £20,000 into a pair of ISAs each financial year

Structuring your affairs to minimise tax takes planning. Even if you just use a single ISA you could put £20,000 into an ISA in the first year and £80,000 into a standard share dealing account. Then every year transfer £20,000 into an ISA. You would need to be very lucky to make an annual gain above the annual exemption amount of £12,300. After 5 years or so all your money would be completely protected from tax and you would be unlikely to have paid any during the process

Anyway, what are your thoughts on my original questions?

Most of them have been answered except:

However, what confused me was, do I pay that tax only once I have officially withdrawn the money from the brokerage to my bank account or do I pay it regardless of taking money out of the investment account. I assumed it would be that you pay it regardless. I just wanted someone to clarify this.

In the ordinary case, if not in an ISA or pension you are liable for CGT at the point of disposal (or sale) of the assets, what you do afterwards is irrelevant

premiumz

ColdIron said:

premiumz said:

Audaxer said:

premiumz said:

Secondly, Let's say we are already a higher rate tax payer. When investing in stocks, if we hypothetically invested £100,000 and that £100,000 grew to £500,000 and we wanted to sell all of our shares and use the money for something unrelated to stocks.

We would need to pay capital gains tax on £400,000 profit. Which is 20%. (£80,000). We would then need to pay 45% income tax on £320,000 (£144,000) leaving us with £176,000 after taxes.
Is that correct? That works out to be around 56% paid in taxes.

If that £100,000 was invested in an S&S ISA over 5 years and it grew to £500,000 you wouldn't have to pay any tax on the £400,000 profit.  So unless you have already used up all ISA allowances, or have a significant sums to invest straight away you should be able to make profits without paying any tax.

Appreciate the response. I think you're only allowed to invest £20,000 per year with an ISA? So for example, it would take 5 years just to get the £100,000 into the ISA accounts right?

Yes but you can also put up to £40,000 into a pension so 2 years and job done. As a higher rate taxpayer you may be able to use carry forward. If you have a spouse you can put 2 * £20,000 into a pair of ISAs each financial year

Structuring your affairs to minimise tax takes planning. Even if you just use a single ISA you could put £20,000 into an ISA in the first year and £80,000 into a standard share dealing account. Then every year transfer £20,000 into an ISA. You would need to be very lucky to make an annual gain above the annual exemption amount of £12,300. After 5 years all your money would be completely protected from tax and you would be unlikely to have paid any during the process

Anyway, what are your thoughts on my original questions?

Most of them have been answered except:

However, what confused me was, do I pay that tax only once I have officially withdrawn the money from the brokerage to my bank account or do I pay it regardless of taking money out of the investment account. I assumed it would be that you pay it regardless. I just wanted someone to clarify this.

In the ordinary case, if not in an ISA or pension you are liable for CGT at the point of disposal (or sale) of the assets, what you do afterwards is irrelevant

Hi,
Thanks for the response,
When you say " As a higher rate taxpayer you may be able to use carry forward." What do you mean by that? Are the rules different on ISA accounts if you are a higher rate tax payer?

I'm assuming I don't need to actually fill out paperwork to invest in an ISA? For example, you can just sign up to a brokerage and open an ISA account. But do you need to let the HMRC know you have used that allowance?

I have investments already. So once I sell those and/or put them into an ISA instead, they will be liable to CGT. So, I just pay CGT on the profits and then move them into an ISA if I choose right? You don't pay any income tax on profits made from stock investing outside of an ISA do you? That's what I have gathered from previous replies. It's just CGT at 20% for higher rate tax payers. (I'm just trying to understand what the bill will be when I come to sell these stocks that aren't in an ISA)
I'm thinking I might start selling off some and use that ISA allowance now rather than later.

Thanks

ColdIron

premiumz said:

ColdIron said:

premiumz said:

Audaxer said:

premiumz said:

Secondly, Let's say we are already a higher rate tax payer. When investing in stocks, if we hypothetically invested £100,000 and that £100,000 grew to £500,000 and we wanted to sell all of our shares and use the money for something unrelated to stocks.

We would need to pay capital gains tax on £400,000 profit. Which is 20%. (£80,000). We would then need to pay 45% income tax on £320,000 (£144,000) leaving us with £176,000 after taxes.
Is that correct? That works out to be around 56% paid in taxes.

If that £100,000 was invested in an S&S ISA over 5 years and it grew to £500,000 you wouldn't have to pay any tax on the £400,000 profit.  So unless you have already used up all ISA allowances, or have a significant sums to invest straight away you should be able to make profits without paying any tax.

Appreciate the response. I think you're only allowed to invest £20,000 per year with an ISA? So for example, it would take 5 years just to get the £100,000 into the ISA accounts right?

Yes but you can also put up to £40,000 into a pension so 2 years and job done. As a higher rate taxpayer you may be able to use carry forward. If you have a spouse you can put 2 * £20,000 into a pair of ISAs each financial year

Structuring your affairs to minimise tax takes planning. Even if you just use a single ISA you could put £20,000 into an ISA in the first year and £80,000 into a standard share dealing account. Then every year transfer £20,000 into an ISA. You would need to be very lucky to make an annual gain above the annual exemption amount of £12,300. After 5 years all your money would be completely protected from tax and you would be unlikely to have paid any during the process

Anyway, what are your thoughts on my original questions?

Most of them have been answered except:

However, what confused me was, do I pay that tax only once I have officially withdrawn the money from the brokerage to my bank account or do I pay it regardless of taking money out of the investment account. I assumed it would be that you pay it regardless. I just wanted someone to clarify this.

In the ordinary case, if not in an ISA or pension you are liable for CGT at the point of disposal (or sale) of the assets, what you do afterwards is irrelevant

When you say " As a higher rate taxpayer you may be able to use carry forward." What do you mean by that? Are the rules different on ISA accounts if you are a higher rate tax payer?

Carry forward is a mechanism applicable to pensions that allows you to use unused pension allowance from previous years. Nothing to do with ISAs whatsoever.

I'm assuming I don't need to actually fill out paperwork to invest in an ISA? For example, you can just sign up to a brokerage and open an ISA account. But do you need to let the HMRC know you have used that allowance?

In most cases you will be able to open an ISA online but your ISA provider might ask additional questions, perhaps about your identity or to declare that you haven't opened an ISA elsewhere in the current year, and might send you a form to fill in. You do not need to notify HMRC at all. ISAs are effectively invisible to them

I have investments already. So once I sell those and/or put them into an ISA instead, they will be liable to CGT. So, I just pay CGT on the profits and then move them into an ISA if I choose right?

Mostly right. Your gains will be liable to CGT but you may not pay any tax on them. Everybody has an 'allowance' (the Annual Exempt Amount) of £12,300 per year so you only pay tax on gains above that amount. You could choose to sell just enough in any year to keep your gain below the threshold

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

You don't pay any income tax on profits made from stock investing outside of an ISA do you? That's what I have gathered from previous replies. It's just CGT at 20% for higher rate tax payers. (I'm just trying to understand what the bill will be when I come to sell these stocks that aren't in an ISA)

The capital gains regime is quite separate from the income tax regime. What CGT you pay will depend on your decisions and actions

I'm thinking I might start selling off some and use that ISA allowance now rather than later.

An excellent idea

jamei305

Linton said:

As to it being "mental" - I find it difficult to justify someone making a living from investments paying less tax than someone earning the same amount.

There are good reasons for capital gains tax rates being lower than income tax rates. Risk of loss, double taxation and inflation to name a few.

NottinghamKnight

It's actually arbitrary and has varied radically over the years. CGT is looking like a target for increased taxation in the near future.