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Weekend reading: the Big Could Have Been Worse Budget

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Feel free to skip one more pundit’s view of the Budget if you’ve had enough. I’m not claiming to be John Maynard Keynes. This is just how I see things.

When asked why he robbed banks, the US heist wiz Willie Sutton said: “Because that’s where the money is.”

Those hit by what passes for wealth taxes in Labour’s October Budget should sigh and say the same.

Yes, capital gains taxes have gone up a little. But entrepreneurs and investors with money to spare outside of tax shelters – or the gumption to start a business – don’t do it for a few percentage points of tax arbitrage versus income tax. We do it because the £760,000 you’re left with after a now-24% levy on every £1m you make in gains is still life-changing, compared to the average UK salary of £36,000 a year.

No, you soon won’t be able to pass along a multi-million pension pot to the next-generation tax-free.

But the state doesn’t provide tax reliefs for pension savings so that your kids need never work again. It does so to encourage you to save for a time when you can’t or won’t yourself. Scrapping the Lifetime Allowance for pensions doomed the IHT ruse, and the trade-off is a sensible one.

Higher stamp duty when you buy a second-home or investment property?

Well I don’t like transaction taxes on principle. But if we’re going to have them, then at least this targets the pointy-end of the property market.

Reversing the 20-year advance that landlords made versus first-time buyers continues. With house price to income ratios still off the charts and buying in the South impoverishing-to-impossible for most young people without a suitcase of cash from mum and dad, I’m at peace with that direction of travel, too.

We tried the rest, now here’s what’s left

Real wage growth in the UK has been flat since the early 2000s. Near-zero interest rates for more than a decade after the financial crisis only inflated the wealth of those with assets – even as the bottom half that relied on lowly wages or state benefits saw their standard of living go nowhere, before the post-Covid inflation shock squeezed them for what was left.

If you’re really upset by Rachel Reeves’ Budget then you’ve probably either done very well – relatively-speaking – for the past 15-20 years or else you’ve been in denial about the state the UK is in. Count your blessings.

I’m fully aware that Monevator has wealthy readers and we’re generally pro-capitalism and getting ahead around here. So this isn’t a sermon that’s likely to have our parishioners throwing their hats into the air.

But a reckoning was overdue and here it is.

We need to manage the UK as the middle-ranking mostly pretty poor country (judged per capita) that it now is. Not pander further to the fantasies of post-2016 populism.

Some friends of mine bemoan a return of ‘the politics of envy’.

But I just see a return to the politics of reality.

A B- Budget

This was not a perfect Budget. Not even judged by my standards, which is akin to judging how well an ambulance crew performs when it arrives to find the patient already blue on the floor and gasping.

The biggest tax-raising measure – the hike in employer’s national insurance – can only hurt growth in itself, even if spending money had to be raised somewhere to stave off worse. At the margin it will make the young and low-skilled less employable.

Hospitality and retail will suffer. And personally I wouldn’t be taxing jobs harder with a potential AI revolution at the door.

But income needed to be found. This country couldn’t take another round of austerity, even if it had voted for it – which it didn’t do in voting for Labour, or for Johnson years beforehand. To get itself past an electorate either unwilling or unable to face facts, Labour had sadly boxed itself in with red lines around the other big revenue raisers. So here we are.

Even with the tax hikes, Reeves’ additional borrowing has slightly rattled the gilt market – although I judge much of the fairly modest rise in bond yields we’ve seen is ongoing recession risk being taken off the table in the US, with knock-ons around the world. I see the Budget as only adding a kicker.

So it’s far from another Disastrous Mini-Budget.

However it is a bit of Show Me The Money concern.

Paying for that protest vote

Everyone sensible knows the UK needs growth. The State needs it, and we need it in our pay packets.

Neither I nor the OBR thinks this Budget will do much for growth over the long-term. The latter forecasts a little boost upfront and then if anything a gentle decline in the long-term.

That’s not good enough.

But again, what’s the alternative?

The UK electorate voted to make itself poorer in 2016, rightly or wrongly. That bill – plus the same for preventing a potential depression during Covid – has come due. Decisions have consequences.

Even if you don’t agree with Goldman Sachs, the OBR, and other mainstream economists that leaving the EU is indeed on its way to costing us the 4-5% hit to GDP that was predicted and is playing out, not even the lunatic fringe can divine any Brexit dividend. Ironically the only reason things aren’t worse economically is because immigration has gone through the roof.

Going it alone could only have boosted the UK’s economic prospects with the deregulated ultra-capitalist ‘Singapore on Thames’ model. Boris Johnson rejected that years before Reeves took charge.

So we’re back to tax and spend – except it’s as much to keep the lights on as to invest in infrastructure.

Still, that’s better than austerity at this moment in time.

Labour’s political opponents have understandably focused on taxes going up after Labour’s election pledges in spirit implied no such thing.

Fine, but firstly their manifesto didn’t add up either. Both sides have seen this country prove for a decade that it will only vote en masse for pretty lies.

Secondly, what would the Budget haters do differently?

Cut services further? Everyone can see they’re falling apart.

Cut taxes to stimulate growth? We couldn’t even afford the last unfunded bung.

Fudge the books by not being frank about spending commitments and promising investment and ‘levelling up’ that was just rhetoric plastered on top of a crumbling national fabric? Oh yeah, we tried that.

I say be careful what you wish for.

You too can be a millionaire

As for our own wallets, well I can still put £80,000 a year into tax shelters – via ISAs and pensions – and I can invest my way to a comfortable retirement without some silly lifetime cap on my gains. The tax-free lump sum was left intact too.

None of the nightmare scenarios came true. Not even flat-rate tax relief.

If you’re a high-earner you can easily make yourself a multi-millionaire helped by those reliefs, without starting so much as a lemonade stand in terms of real risk-taking.

Can any of us – hand on heart – say that isn’t still plenty of room to do well for ourselves?

There was even the rabbit in a hat of the freeze on income tax thresholds being lifted in 2028. A half-boiled bunny for sure, but if I was Reeves I’d have extended them further and not hiked employer’s NI.

As for being clobbered by the supposedly crushing fist of the leftwing unleashed, according to the Budget calculators I’m about £1.36 a year worse off from Reeves’ measures.

So let’s have some perspective.

The actual ultra-left – Jeremy Corbyn and his fellow travellers – have penned an open letter condemning this Budget as ‘austerity by another name’.

First, do no harm

Reeves has not solved anything with her Budget but it shouldn’t make things worse.

Given the rubbish place we’re starting from, that’s no mean achievement.

With luck she’s bought time for a few good years and a fortunate break or two to get the UK economy going again. That might give us a bit more room to be bolder. We’re overdue a bounce.

But I know many of you will disagree, one way or another.

Before we kick things about in the comments, let’s remember Labour hasn’t been in charge for 14 years. Let’s not pretend the UK was humming along before somebody let the long-haired students in to seize the levers of state.

And if Liz Truss is reading, I got some stick for not totally sticking it to your Budget, because you did sort of address the elephant in the room – the lack of economic growth. Unfortunately that message was wrapped in a package as convincing as a man with a billboard crying the end of the world is nigh. Which ultimately only made the markets and the electorate less tolerant of radical action.

No, Britain signed up for gentle decline years ago. The spirt of the 52% is like an old person blustering around a care home talking about the good old days and complaining he can’t understand the nurses’ accents.

Now Barry Blimp is moaning that he has to take his medicine. I’m shocked.

Sorry, but the grown-ups are back in charge. They’re doing what they can, but that’s only so much.

As for the alternative, I’d love to hear a well-argued and costed counter-narrative spelling out a lower tax, higher growth future with a respectable welfare state left intact – as judged by the electorate, not the rich flying by to their private stand-ins. And that’s certainly not coming from the Tory leaders in waiting.

So tax, spend, and muddling on it is.

You’ve read one Budget roundup, you’ve read them all:

  • How the Budget will affect you and your money – BBC
  • The key changes announced – Which
  • Same, but with some political response in the mix – Guardian
  • A long link list to articles on every Budget measure – Money Saving Expert
  • Same, but more politicised [scroll down past the big pictures]This Is Money
  • The Employer National Insurance hike explained – This Is Money

More Budget opinion:

  • Paul Johnson: There are big risks lurking in this Budget – IFS
  • Response to the Autumn Budget – NIESR
  • Faisal Islam: Where is the growth in Reeves’ ‘Budget for Growth’? – BBC
  • Aditya Chakrabortty: At last a government willing to spend, but… – Guardian
  • Robert Shrimsley: Goodbye to low-tax Britain [Search result]FT
  • ‘Fixing the foundations’ Budget has done nothing of the kind – This Is Money
  • Analysing Rachel Reeves’ Budget [Podcast]The Rest is Politics
  • Delivering a Budget for National Renewal – The 99% Percent
  • Ian Dunt: Take stock, catch a breath – Striking 13
  • Bart Van Ark: This was not the ‘productivity’ Budget – The Productivity Institute
  • Dan Neidle: Agricultural property inheritance relief changes not all that  – Via X 
  • Tim Leunig: There are good reasons for Reeves to raise taxes – Politics Home

Have a great weekend!

[continue reading…]

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Capital gains tax in the UK

UK capital gains tax explained

Until the government starts taxing sex, capital gains tax (CGT) is probably the most annoying tax to pay.1

Capital gains tax is levied on the profits you make when you sell or transfer most assets. These assets include shares, investment properties – even a stake in your own company.

Like a maggot in your birthday cake, capital gains tax can really spoil the fun of making money.

Inheritance tax is a tax on your good fortune. Income tax is the cost of having a job.

But CGT is a tax on investing success.

Take cover from CGT! Always try to use ISAs and pensions to shelter your investments from taxes. No tax is payable on gains realised within these wrappers.

Of course, you won’t always make a profit when you sell an investment.

Sometimes you’ll lose money. That’s called a capital gains loss.

Unfortunately you don’t get money back from the government when you lose money.

However you can offset your capital losses against your gains to reduce your total taxable gain. You can also defuse unsheltered gains using your annual CGT allowance.

How UK capital gains tax works

Like income tax, CGT is calculated on the basis of the tax year. This runs from 6 April to 5 April the following year.

You pay tax on the total taxable gains you make selling assets in the tax year, after taking into account:

  • Your annual CGT allowance. (See below).
  • Other reliefs or costs that can reduce or defer the gains.
  • Allowable losses you made by selling assets that would normally be liable for CGT. (The opposite of a capital gain, in other words).

Everyone has an annual capital gains tax allowance, or ‘annual exempt amount’ in HMRC-speak. This allowance was halved to £3,000 on 6 April 2024. It is now frozen at this level.

If your total taxable gains, minus any deductions, come to more than your annual tax-free allowance, then you pay CGT on everything over that allowance.

Capital gains tax rates

The capital gains tax regime was simplified in Labour’s October 2024 Budget.

Unfortunately the same Budget increased CGT rates, too.

The specific rate you’ll pay on your gains depends on your total taxable income.

Higher CGT rates from 30 October 2024:

  • Basic-rate taxpayers now pay 18% on their capital gains.
  • Higher-rate taxpayers pay 24%. 

These rates were increased in the Budget from the previous levels of 10% and 20% respectively.

CGT: We’re all in it together

Before the October 2024 Budget, second homes and buy-to-let properties2 were taxed at higher rates than other assets such as shares.

However CGT rates on non-property assets were increased in the Budget to the same level as those levied on property gains.

Meanwhile the rates levied on property were left unchanged.

Hence all chargeable assets are now taxed at those same 18% and 24% rates.

Your main home is nearly always exempt from capital gains tax under what’s called Private Residence Relief. This is automatically applied unless you’ve let your home out to more than a single lodger, used it for business, or if you’ve substantial acreage. In those cases, CGT might be payable.

Note that you might normally be a basic-rate taxpayer, but pay a higher rate on your capital gains. This could happen if the money made via your gains moves you into the higher-rate tax bracket.

To work out what rate you’ll pay, your capital gain is added to your taxable income from other sources (salary, dividends, savings interest, and so on).

It can get a bit complicated. See HMRC’s notes on working out your capital gains tax rate band.

What is CGT charged on?

Historically-speaking, CGT has been a fairly avoidable tax for most everyday investors in the UK.

(Remember, you’re allowed to mitigate your taxes. Tax evasion is illegal.)

However the big decline in the annual CGT allowance – from over £12,000 a few years ago to just £3,000 from 6 April 2024 – has made it much harder to mitigate a potential capital gains tax bill.

Putting assets into tax shelters before they make any gains has thus become even more important.

Most capital gains on asset sales are taxable, but in the UK capital gains tax is NOT charged on:

  • Your main home (in 99% of cases)
  • UK Government bonds (gilts)
  • ISA and SIPP holdings
  • Personal belongings worth less than £6,000 when you sell them
  • Your car, unless used for business
  • Other possessions with a limited lifespan
  • Betting, lottery, or pools winnings (including spreadbets)
  • Money which forms part of your income for Income Tax purposes
  • Venture Capital Trusts
  • Certain business holdings that qualify for entrepreneur’s relief

That still leaves many key assets liable for UK capital gains tax:

Remember if you can hold these assets inside a tax shelter (ISA or pension) you’ll escape the sting of capital gains tax. 

Also remember that you have that annual capital gains tax allowance. So you won’t necessarily be liable for CGT just because you’ve sold some taxable assets and made a profit. It depends on your total capital gains for the year.

You might also be able to postpone paying your CGT bill by claiming deferral relief on certain government-sanctioned investment schemes (EIS and SEIS). However these investments can be very risky.

Do your research. Don’t risk big losses just to cut your tax bill.

When to report capital gains tax

You need to report your taxable gains via your self-assessment tax return if:

  • Your total taxable gain in the tax year exceeds your CGT allowance, and/or
  • Your sales of taxable assets are in excess of £50,000 and you’re registered for self-assessment.

Under the current regime, if you sold £20,000 worth of shares in the year for a total gain of £2,000, there’s no need to report any of it. Your £2,000 in gains is below the annual CGT allowance. And your total sales were less than £50,000.3

In contrast, if you’d sold £52,000 of shares, say, and you are registered for self-assessment, then you would have to report the details to HMRC, regardless of the size of your total gain. That’s because you’ve sold taxable assets in the year in excess of the £50,000 threshold.

Capital gains are pooled together

All capital gains and losses go into the same ‘pot’ from the Inland Revenue’s point of view.

For example, if you made a gain (i.e. profit) of £15,000 selling shares and £8,000 from selling an antique wardrobe, then your total capital gain is £23,000.

Here losses might help you out.

For example, let’s imagine you make a taxable gain on your shares but a loss on selling your buy-to-let property. Your property loss can be offset against your capital gains on shares to reduce or even wipe out the tax bill that might otherwise be due.

See my article on mitigating capital gains tax for other strategies.

Who pays Capital Gains Tax in the UK?

Very few people pay capital gains tax.

A recent study of anonymised personal tax returns found that 97% of people never make any chargeable capital gains. Those who did were generally drawn from the ranks of the wealthy.

According to the Guardian:

Just 0.3% of people with income under £50,000 had taxable gains in an average year, compared with almost 40% of taxpayers with incomes over £5m receiving some gains.

Almost half of those who made a capital gain lived in the south-east. A quarter lived in London.

So paying capital gains tax puts you into a fairly exclusive club.

For investors, however, capital gains is an occupational hazard. If you are not able to do all of your investing inside ISAs and pensions, then you will probably pay CGT sooner or later.

Especially given how the annual CGT allowance has been slashed in recent years.

How do the UK’s CGT rates compare with other countries?

Even at the new higher rates, the UK regime is fairly competitive. Here are some example headline rates from our peers as of September 2024:

Source: Financial Times

It’s tricky comparing rates between different countries, as there can be lots of quirks, extra levies, and special allowances. Some countries may impose a wealth tax, or seek to generate revenues via higher transaction taxes.

The UK isn’t the only nation with a complicated tax code!

Certain jurisdictions do not charge CGT at all. These include the Bahamas, Belgium, Bermuda, the Cayman Islands, Gibraltar, Hong Kong, Jersey, Guernsey, the Isle of Man, the Netherlands, New Zealand, Qatar, Saudi Arabia, and Singapore.

Capital gains tax and me

I’ve paid CGT. I wasn’t even very wealthy at the time. Certainly my annual income was no great shakes.

I began investing 20-odd years ago with a biggish lump sum that I’d originally saved up as a house deposit.

I should have steadily put this cash into ISAs over the ten years or so it took me to save it. But I was silly and I didn’t. And so when I began investing, I had to build up my ISA tax shelter capacity from scratch. One year’s allowance at a time.

Eventually this landed me with a five-figure CGT bill when I sold the last of my unsheltered investments – and this despite years of diligently defusing my gains along the way.

You make your own luck

That investment had gone up more than ten-fold since I bought it outside of an ISA, a decade or so earlier.

Lucky me, you say?

Perhaps, but remember I wasn’t super-rich. I began as just a determined saver trying to keep up with the runaway London housing market. My initial deposit comprised of several tens of thousands of pounds of hard-won savings that I could have spent instead on holidays, clothes, or simply having more fun in my 20s and 30s, like most of my friends.

That is why I usually write that you ‘make’ a capital gain, or even that you ‘earn’ a gain.

Whereas The Guardian with its own biases says you ‘receive’ it. As if the capital gain just falls from the sky – like windfall!

That is true of an inherited gain, say – at least for the recipient

But capital gains nearly always only come after you’ve risked your own money.

So do what you can to keep hold of that reward in full by shielding your investments from capital gains tax.

  1. Update: since I first wrote this article I bought my own home and paid Stamp Duty Land Tax at 5%. Turns out that’s just as annoying. []
  2. Held personally. Properties held via a limited company are on a different regime. []
  3. Remember, these are sales outside of an ISA or SIPP. Sales within shelters are not liable for CGT and not counted at all. []
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Capital gains tax on shares

A ticking time bomb acts as a visual metaphor for the need to defuse capital gains tax on shares and other investments.

Considering how few people ever have to pay it, there’s always a lot of worry and political noise about capital gains tax on shares.

Capital gains tax (CGT) falls due on investments you sell for a profit in any given tax year, unless:

  • The asset is sheltered in your ISAs or pensions.
  • Your gains can be sufficiently offset by your trading losses on other shares and assets. See our guide to defusing your capital gains below.
  • The asset is exempt from capital gains tax.

CGT on shares and other assets is payable on your profits – that is, the difference between what you bought the asset for and what you sell it for, after costs.

For example if you buy a share for £100 and sell it for £1,100 ten years later, then your gain equals £1,000.

CGT is payable on your total taxable gains in a tax year. All capital gains and losses are pooled together for HMRC purposes.

If you fall into the ‘liable for tax’ net then you’ll pay CGT on the gains you’ve made above your tax-free allowance.

However, there are plenty of strategies you can legitimately use to reduce or eliminate capital gains tax on shares.

How much is capital gains tax on shares?

The capital gains tax rate on shares and other investments is:

  • 18% for basic-rate taxpayers.
  • 24% for higher-rate taxpayers and additional-rate taxpayers.

The rate you pay normally depends on your total taxable income.

Beware that basic-rate taxpayers can pay CGT at the higher rate, if your gains nudge you up a tax band.

You can work it out like this:

  • Subtract your annual CGT allowance from your total taxable capital gains.
  • Now add to that your total taxable income (including salary, dividends, savings interest, pensions income and so on, minus income tax allowances and reliefs).
  • You pay the higher CGT rate on any profit that falls within the higher-rate income band.

Note: Scottish and Welsh taxpayers pay CGT at UK rates. A higher-rate Scottish taxpayer may pay capital gains tax at the UK basic taxpayer level.

You need to report your taxable gains via your annual self-assessment tax return.

Do this if your total taxable gain in the tax year exceeds your annual capital gains tax allowance…

OR

…if your sales of taxable assets are over £50,000 and you’re registered with HMRC for Self Assessment.

For example, if you sold £70,000 in shares, then you’d need to report the gain – because the amount sold is higher than the CGT reporting limit of £50,000.

Remember that sales of assets in ISAs and SIPPs aren’t reported. Don’t count them in your sums at all.

Offshore funds may pay tax at even higher than CGT rates

Capital gains on offshore funds are taxed at higher income tax rates – rather than CGT rates – if they:

  • Do not have UK reporting fund status.
  • Aren’t protected by an ISA or SIPP.

Check that any offshore funds you own (i.e. any not domiciled in the UK) have UK reporting fund status. This should be indicated on the fund’s website. HMRC also keeps a list of reporting funds.

A kicker is that you can’t cover non-reporting fund gains with your CGT allowance either.

Capital gains allowance on shares

The annual capital gains tax allowance (or Annual Exempt Amount) for your total profits is £3,000 – starting with the tax year 2024-2025. 

The UK Government regularly issues updates on CGT.

Capital gains tax exemptions

Some investments and other assets are exempt from capital gains tax:

  • Your main home (in most cases)
  • Individual UK Government bonds (not bond funds)
  • Cash which forms part of your income for income tax purposes
  • NS&I Fixed Interest and Index-Linked Savings Certificates
  • Child Trust Funds
  • Premium bonds
  • Lottery or betting winnings
  • Anything held in an ISA or SIPP

Capital gains tax is payable on shares, ETFs, funds, corporate bonds, Bitcoin (and other cryptocurrencies), and personal possessions worth over £6,000, including some collectibles and antiques.

Avoiding capital gains tax on shares

You can reduce your tax bill by offsetting trading losses against your capital gains. This is known as tax loss harvesting and it is a legitimate way to avoid capital gains tax on shares.

Terminology note Tax avoidance means legally reducing your tax bill such that HMRC won’t raise an eyebrow. Tax evasion involves things like owning shell companies like some people own shell suits, and funnelling cash to places with super-yacht congestion problems. These days the best phrase to use in polite society is tax mitigation.

Tax-loss harvesting involves selling shares and other assets for less than you originally paid for them. You strategically sell assets to realise losses you are already carrying in your portfolio, thus minimising your capital gains.

You don’t try to create losses with bad investments! That is where people can get confused.

The goal is ideally to reduce your gains to within your CGT allowance for the year.

We’ve come up with a quick step-by-step guide to help you do this.

1. Calculate your total capital gains so far

Tot up the gains, if any, you’ve made from selling shares, funds, and other chargeable assets this tax year (which starts on 6 April).

Your records (or your platform’s statements) are worth their weight at moments like this.

You need to include every sale you made over the tax year, regardless of what you did with the money afterward.

You make a capital gain on any share holding or fund (outside of ISAs or SIPPs) that you sold for more than you paid for it.

Work out each capital gain by subtracting the purchase value and any costs (such as trading fees) from the sale proceeds.

Add up all these capital gains to work out your total capital gain for the year.

Remember that shares and funds are not the only chargeable assets for CGT. You need to add all such capital gains into your total for the year. They all count towards your annual CGT allowance.

For example, any property – other than your main home – is potentially liable for CGT when you sell it.

See HMRC’s property guidance.

2. Calculate your losses

You register a capital loss if you sold shares, other investments, or a dodgy buy-to-let flat for less than you originally paid for it.

Add up all your losses over the year.

Grit your teeth, fling your hands over your eyes, and peek at your grand poo-bah loss.

Remember it’ll be okay because you’ll harvest the loss to neutralise your gains.

Sales of CGT-exempt assets don’t count towards capital losses. You can’t count disaster-trades that happened within your ISAs and SIPPs, for example.

Now for the good bit: offsetting your losses against your gains.

Let’s say you made £15,000 in capital gains on shares over the year, and you made capital losses of £14,000. Your total gain is £1,000.

Your losses have trimmed your gains to less than your annual CGT allowance. No capital gains taxes for you this year! Though possibly you should swap share trading for a more lucrative side hustle…

You can also offset unused capital losses you made in previous years, provided you notified HMRC of your loss via earlier years’ tax returns.

(Best do so in the future, eh?)

3. Consider selling more assets to use up more of your CGT allowance and so defuse future gains

You now know what your total capital gains for the year are (from step 1), after subtracting any capital losses (step 2).

If your total gains are higher than your CGT allowance

…then you’ll pay CGT on the gains above the allowance.

If you will have CGT to pay, then, before the tax year ends, consider selling another asset you’re carrying at a loss in order to offset that loss against your gains. This will further reduce or eliminate your capital gains tax bill.

If your total gains are less than your CGT allowance

…then you won’t have to pay any capital gains tax on those gains. Hurrah!

You don’t need to report the trades to HMRC, either, provided the total amount1 you sold the assets for is less than £50,000 or you’re not registered for Self Assessment taxes.

Before the tax year ends, consider selling down another asset you’re carrying that is showing a capital gain. This will enable you to use more of your available CGT allowance for the year – provided you don’t go over your annual allowance, of course.

Like this, you will defuse more of the capital gains you’re carrying. This can help you avoid breaching your CGT allowance in future years.

Admittedly this is pretty hard to do now, with the annual capital gains tax allowance having been cut to £3,000. (It used to be over £12,000.)

But every little helps.

If you’ve made an overall loss in a tax year

…after subtracting losses from gains, then you should declare it on your self assessment tax return.

Capital losses that you declare and carry forward like this can be used to reduce your capital gains in future years, when you might otherwise be liable for tax.

Losses can be a valuable asset, but only if you tell HMRC.

4. Reinvest any proceeds from sales

If you made any share sales to improve your capital gains position, then it’s time to reinvest the cash you raised.

These are the key techniques:

Bed and ISA / Bed and SIPP – Ideally you’ll now tax-shelter the money you released within a stocks and shares ISA or SIPP. That puts that money beyond the reach of capital gains tax in the future.

You can purchase exactly the same assets in your tax shelters, immediately.

New asset – If your tax shelters are full and you don’t want to earmark the money for next year’s ISA/SIPP, then you can reinvest in a different holding as soon as you’ve completed your sale.

This new investment starts with a clean slate for CGT purposes.

Beware the 30-day rule – You need to wait 30 days to reinvest in exactly the same share, ETF, or fund outside of your tax shelters.

If you flout the 30-day rule, then the holding is treated as if you never sold it. Which undoes all your tax-loss harvesting work.

Same but different – You can sidestep the 30-day rule by purchasing a similar fund (or share) that does the same job in your portfolio. For instance, the performance gap between the best global index funds is usually small.

You can defuse your gain, buy a lookey-likey fund straightaway with the proceeds, and keep your strategy on course.

Bed and spouse – This is the ever-romantic finance industry’s term for keeping an asset in the family. You sell the asset and encourage your spouse or civil partner to purchase it in their own account.

Your gain is defused and your significant other starts afresh with the same asset. This maximises the use of the two CGT allowances available to your household.

Tax on selling shares

The cost of trading is a bit like a tax on selling shares. It’s a can’t ignore factor that means selling for tax purposes isn’t always a good idea.

Trading costs include dealing fees, any stamp duty you pay on reinvesting the money, and also the bid-offer spread on the churn of your holdings.

Trading costs can reduce the benefit of defusing gains – especially on small sums.

It’s best to realise capital gains as part of your rebalancing strategy, when you’re already spending money to reduce your holdings in outperforming assets while adding to the laggards.

Deferring capital gains tax

You can defer capital gains tax on your shares and other assets by never selling.

No sale, no gain, no capital gains tax.

This is especially relevant if you’re an income investor who hopes to live off their dividends for the rest of their life.

In this case, you simply enjoy the dividend income from your shares and let the capital gain swell.

A risk though is you could someday be forced to sell.

Unforeseen emergencies are one problem. Routine events such as company takeovers, fund closures, or mergers can also count as disposals for CGT purposes. Then you’ll be hit with a big tax charge on the gains.

Best practice would therefore still be to try to defuse gains as you go, by using your annual CGT allowance as described above. This reduces the tax impact of any unforeseen sales in the future.

You can also defer paying CGT by rolling your gains into higher-risk investments known as Enterprise Investment Schemes. Do a lot of research before going down this path though. Such schemes are usually best left to sophisticated investors. 

Capital gains tax on inherited shares

Capital gains tax is not payable on the unrealised gains of shares belonging to someone who dies.

Inheritance tax may be due on the value of the shares, but not CGT.

Any gain you make between the date of the person’s death and your disposal (of the shares, not the body) does count for capital gains tax purposes though.

That’s assuming you couldn’t tuck your inherited assets into a tax shelter straightaway. (You may have had other things on your mind…)

Capital gains on shares help

HMRC issues lots of guidance on calculating capital gains tax on shares.

It’s also an unwritten rule that we writers must include a warning about ‘not letting the tax tail wag the investment portfolio dog’ in any article like this.

It’s true that there’s a fine line to tread between avoiding a bigger capital gains tax bill and becoming dangerously obsessed with minimising it.

But in practice, most of us can do a fair bit of selling to defuse CGT – without derailing our strategy – just by repurchasing the assets within an ISA or SIPP.

Think of it partly as an insurance policy. You may as well use the allowances you’ve got now, in case you get more money and more capital gains on shares in the future – but not more allowances.

The CGT allowance could even be reduced or removed by a future government. (Rueful hindsight: since the first version of this article – and that sentence – was written, the CGT allowance was halved!) 

Annual allowances like the capital gains tax allowance are usually a case of use it or lose it.

  1. Note: the total amount not the capital gain! []
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How to work out which platform is cheapest for you

How to work out which platform is cheapest for you post image

Which investing platform is cheapest for you? Which online broker best suits your needs? These are simple-sounding questions, but they twist the antennae of many Monevator readers.

That’s because the online platform / broker market is a swamp of confusion pricing – as one look at our platform comparison table will tell you.

Figuring out which platform is cheapest

Happily, you can work out which platform is cheapest for yourself just by following a few straightforward steps…

Step 1 – Preparation

First jot down the key factors that affect your calculation:

  • The size of your portfolio.
  • The account types you want – SIPP, ISA, or general investment account (GIA).
  • The products you want – Funds, ETFs, investment trusts, shares, bonds, and so on.
  • How often you will buy and sell – You may not know for sure, so estimate this based on past patterns or future intentions.

Note that the number of products you own doesn’t matter. No platform will charge you more for owning nine ETFs versus five, for example. (Keep in mind though that a few brokers charge switching fees based on your number of holdings. This only becomes relevant if you decide to move your business).

Next tot up all the charges you’d incur with the most competitive of the flat-fee platforms. (See our flat-fee broker comparison table near the top of our platform comparison page.)

Make sure you count any annual platform fees, trading costs, and other relevant charges listed on the Monevator table or the platform’s own price schedule. Remember to add the cost of multiple accounts if you hold them.

You now have a base cost for the investing services you require.

From here we can compare that cost against the best of the percentage fee platforms. The winner will be the cheapest deal for you.

Percentage fee platforms are generally best for people with small portfolios, whereas competitive flat-fee platforms are typically better for portfolios larger than £20,000 in ISAs.1

Note: The problem with percentage-fee platforms is that as your portfolio swells, the costs may keep rising, too. In an extreme case – say a £1 million portfolio that’s all invested in funds – this cost vampire could be sucking out more than £3,000 a year versus as little as £200 for the same portfolio held with a flat-fee platform. So be aware that which platform is cheapest for you could change over time.

Step 2 – The money shot

To compare flat-fee Platform A with percentage-fee Platform B, make the following calculation:

Total annual costs of platform A2 divided by platform B percentage rate3
= breakeven point

For example, if your fixed rate costs at Platform A = £80 and you’re comparing with a 0.25% rate at Platform B:

£80 / 0.0025 = £32,000

The breakeven point – £32,000 in this example – refers to your portfolio’s size. At this point, your costs will be the same with either platform.

In the example above, we’re better off with platform A if our portfolio is worth more than £32,000. Any less and we should bunk up with platform B.

A few things to remember:

  • Subtract any additional fixed rate costs charged by Platform B from Platform A’s fixed costs before making the calculation, so you’re comparing fairly.
  • Check if cheaper regular investment trades are available for the products you want.
  • Add in your portfolio’s Ongoing Charge Figure (OCF) to compare platform choices that don’t stock exactly the same products, or that offer discounts on certain fund manager’s charges.
  • Watch out for caps on percentage fees that can make a broker more competitive in certain scenarios. For example, AJ Bell, Fidelity, and Hargreaves Lansdown set a ceiling on the fees you’ll pay for ETFs, shares, investment trusts, and bonds. 

Step 3 – What about zero commission brokers?

Some platforms have abolished the main sources of brokerage income: platform fees and trading fees. For this act of largesse they’ve earned the moniker zero commission brokers. Sounds like a great deal!

But hang on, how do they pay for their salaries, app development, servers, shiny offices… and make a profit?

Zero commission brokers are not a scam, but they do need to earn money, so don’t be fooled into thinking they’re free. 

We wrote a piece on zero commission brokers delving into their various revenue sources such as spreads, premium services, currency conversion fees, interest rate arbitrage and so on. Have a read and then you can make a more informed decision if you’re considering this route. 

Ultimately, zero commission brokers are like any freemium service. You’re spared the pain of forking out upfront fees, but they must recoup the cost of your custom in other ways, some of which may not be obvious.

It’s worth repeating that zero commission brokers are not intrinsically dodgy. Some of them have been operating successfully for over a decade. 

But it’s a good idea to understand how they make money. Then you can pick the one that isn’t poised to profit excessively from your investing behaviour. 

Step 4 – What happens next

If your choice of broker hinges on your portfolio’s size then consider how quickly your assets are growing or shrinking when deciding which platform is cheapest.

Are you piling cash into the pot? Or selling out faster than an old rocker being offered a knighthood?

If you’re likely to smash through the breakeven point within a year or two, it may be worth going with the platform that will suit you in the foreseeable future.

Also watch out for switching fever – the unbearable pressure to take action just because your platform is a smidge less than optimal.

In our example above, the difference in fees would only be £20 per year if the portfolio grew to £40,000 in size. Switching hassle can make bolting for the door an exercise in self-harm every time your platform falls off the Best Buy spot.

Pay attention to entry and exit charges when you switch brokers – see our table. Some readers have reported success in demanding their platform waives its exit charges.

Also beware that switching brokers can be a (too) lengthy process, and it may leave you out of the market for some time if you’re forced to cash out of your positions before switching.

See our guides on transferring an ISA and on transferring a pension for more.

Protect your portfolio – Remember there are limits to compensation should the worst happen to your broker. You might therefore decide to use two or more brokers to spread your risk. See the Financial Services Compensation Scheme for more information.

Some canny Monevator readers time their switching to take advantage of temporary cash back offers.

We wouldn’t suggest you let such antics risk derailing a once-a-decade push to sort out your finances. But if you’re on top of this stuff – the sort who checks the comments on the Monevator broker table before you open your email – then it could be a way to pick up some free loot en route.

Take it steady,

The Accumulator

  1. Or thereabouts: The more you trade, the higher those thresholds will be. []
  2. Subtract any fixed costs of platform B including dealing charges. []
  3. Note that multiple percentage rates may apply if your portfolio is very large and the platform’s charges are tiered, so you may need to work this out. []
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