capital gains & Investments

jzi19

I was toying with the idea of buying some investments with this years ISA allowance. Would I be right in the following?

Capital gains tax allowance is currently £9600 for the 2008-2009 tax year.

Say I had Invested in a fund (not using the ISA) and decided to cash them in - and they earnt £5000 profit. Assumming my CGT allowance hadn't been used at all at that time, would I be right in thinking Id pay no CGT tax on this £5000 due to the limit being £9600?

In which case the next step would be to see if this +£5000 income takes me into the higher tax band, in which case I'd owe the taxman the 40% on amounts above the threshold?

Investing using ISAs - does it mean you could in theory earn more than £9600 and not pay the CGT on the profit? Im a little unsure where the benefits of investing with an ISA is - or have I missed something here? If this is the case, then for the most part, its fair to say I dont expect to be making >£9600 profit from £7200 investment in which case I may as well just use the ISA as a cash ISA and invest independantly from the ISA. Err... would my assumptions be correct, or have I overlooked something important along the way?

Thanks.

Aegis

jzi19 wrote: »

I was toying with the idea of buying some investments with this years ISA allowance. Would I be right in the following?

Capital gains tax allowance is currently £9600 for the 2008-2009 tax year.

Say I had Invested in a fund (not using the ISA) and decided to cash them in - and they earnt £5000 profit. Assumming my CGT allowance hadn't been used at all at that time, would I be right in thinking Id pay no CGT tax on this £5000 due to the limit being £9600?

Correct.

In which case the next step would be to see if this +£5000 income takes me into the higher tax band, in which case I'd owe the taxman the 40% on amounts above the threshold?

Nope. You have no income tax liability on capital gains. If your capital gains are within the annual allowance, you pay no tax at all on your realised gains.

Investing using ISAs - does it mean you could in theory earn more than £9600 and not pay the CGT on the profit? Im a little unsure where the benefits of investing with an ISA is - or have I missed something here? If this is the case, then for the most part, its fair to say I dont expect to be making >£9600 profit from £7200 investment in which case I may as well just use the ISA as a cash ISA and invest independantly from the ISA. Err... would my assumptions be correct, or have I overlooked something important along the way?

It starts to be useful when you're a higher rate taxpayer. As a higher rate payer, you are required to pay a further 25% income tax on any dividends, which you can avoid by investing in an ISA.

You can also start to appreciate the usefulness by considering your growth over 20 years. Since the government "helpfully" decided to remove both indexation and taper relief this year, your gains will not be adjusted to account for inflation. As such, it's the absolute gain which will be subject to tax, and over 20 years your investment may make a lot more than £9600 profit. As it currently stands, you'd be looking at 18% tax on that profit outside an ISA, and 0% inside the ISA.