When you first start investing and you’re saving tuppence ha’penny from your newspaper round to buy shares in Apple, the idea that you’ll ever have to pay capital gains tax can seem outlandish.
After all, you get a tax-free capital gains allowance each year – currently £10,600 – and there are also ISAs and pensions that you can tuck money into and so entirely protect it from capital gains tax.
Besides, who makes capital gains anymore? With everyone obsessed with falling share prices rather than the intermediate strong rallies we’ve seen over the past decade – and ignoring what the steadily lowered multiple put on shares might imply for future returns (clue: good stuff) – the only game in town these days seems to be dividend income.
Capital gains are so 1990s!
Finally, capital gains tax is only liable when you sell an investment. Don’t sell, and you don’t have to pay it. Simples!
Tax raided
In reality, capital gains tax (CGT) can sneak up on you unless you take steps to avoid it (not evade it, which is illegal).
- You might have bought shares outside of an ISA earlier in your investing career, before you knew any better.
- You might be saving more than the ISA allowance each year and you don’t like pensions, so you invest the rest unsheltered.
- Maybe you don’t like spreadbetting either, which is also CGT-free.
- You might have railed against tax avoidance strategies due to your softheaded leftist leanings – until you face paying it, which tends to focus the mind.
- You could have long-term holdings – perhaps a portfolio of dividend-paying blue chip shares – where the capital gains have crept up on you, because you didn’t defuse them over the years, and so wasted previous annual allowances.
- You might own growth, tech, or mining shares that ‘multi-bag’. Such massive winners are rare, but they happen, and even a few thousand pounds can turn into a CGT liability when you sell a share that’s gone up tenfold.
- You planned to hold your shares forever – or to slowly realise your gains over several years – but circumstances change and you need to sell now.
- A company you own might be acquired and not provide any tax mitigation strategies, which forces you into crystalising a gain.
- Unit trusts and other collective funds can also be shut down without much warning, again causing a long ignored gain to become a problem overnight.
- You might even sell another kind of taxable asset, such as a stake in a private company or a buy-to-let property, where it is difficult or impossible to gradually defuse the gain over the years without Jimmy Carr-style avoidance schemes.
CGT is payable annually at 18% or 28% (or at 10% if you qualify for entrepreneur’s relief). See my article on UK capital gains tax.
If you have made a gain and you don’t qualify for entrepreneur’s relief or similar, you’d better start limbering up your cheque-writing hand.
But before you do so, consider whether you can offset any losses to reduce your total gain, as well as other capital gains tax avoidance strategies.
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Off topic, but anyway thanks to all who are ‘liking’ our posts via the Facebook button, presumably in light of my lament at the weekend.
It all helps! 🙂
Personally, I’m a long way off capital gains and well within my allowance. My share portfolio is only worth about £3500. When should I start to be more concerned?
@MR – Clearly you’re not at any risk of capital gains tax for some time with a £3,500 portfolio — unless you’re an excellent stock picker! 😉
However given your moniker, I assume you have big ambitions, and plan to save and invest a lot more in the years to come.
Personally I’d get your money into a stocks and shares ISA and use as much of the annual allowance up as you can each year while you can. It’s not really any more costly in the long-run, and it could save you a lot of headaches down the line.
We use both of our CGT allowances every year and my wife also uses her 18% band, so about £7k of tax to pay every January.
Heed the warnings! Wrap everything you can!
As I think another poster said after the last moan about CGT I also think its a pretty good deal
Because of the tax free allowance, the lower rate and the absence of NI, UNEARNED capital gains are taxed way lower than EARNED income from employment
I just stand back and ask: why is that right?
IMHO there is a moral case for taxing unearned capital gains more highly than earned income and an undisputable anti-tax avoidance case for taxing them at the same rate, to avoid what is really employment income being discguised as capital gains
I don’t have any unearned capital gains.
Capital gains are not really unearned IMHO. You allocate your capital and take the risks and rewards. That’s what capitalism means.
I agree disguised remuneration should be dealt with. I could see a case for equal treatment of capital gains and income, even though I’d personally oppose it. But taxing gains more heavily than income doesn’t have any legs to me.
Some people also make capital gains because they work hard to ensure that the asset increases in value. Not all such people qualify for entrepreneur’s relief.
Also as TI says, othes take risks with their (hard-earned and heavily-taxed!) capital and sometimes reap the rewards. As HMG aren’t taking the risk, their reward should be proportional to this, and hence zero.
Risk and hard work always seem to become inconsequential to others when realising a gain and yet they’re the most important at the outset.
Tax wrap or be damned MultimillionaireRoad even if only to avoid the tedium of declaring a dividend, accumulated or otherwise.
You don’t want to fall foul of the SA inquisition!
Even if you are not making enough gains to pay CGT (yet) an ISA is a great benefit. If you have ever had to calculate CGT for holdings held over a long period you will know what I mean. This is especially true if you have had multiple purchases & sales, or have to deal with the different sets of CGT rules that have existed over the years. Having holdings in an ISA also shelters you from the arduous CGT paper work!
I have a question! I’m still fairly new to the world of investing and have a lump sum (roughly £60,000) that I’d like to tuck away into investments.
My strategy thus far has been to simply stash it in a high-interest savings account while dripfeeding portions of it into a stocks & shares ISA every month until my annual allowance is used up. Then when the new tax year rolls along I continue dripfeeding until that year’s ISA allowance is filled, and so on, until eventually I’ve invested the entire sum. At this rate I’m guessing it’ll take about 4-5 years until that happens. (Of course, after that I still intend to continue tucking away money into investments every month, though once this pot has dried up I highly doubt I’ll be able to scrounge up enough to fill up my yearly ISA allowances to capacity anymore — such is the life of a lowly freelance illustrator, I suppose!)
Do you think this strategy is sound, or should I consider putting the excess into non-ISA investments instead of (or in addition to) a savings account in the meantime, and gradually move non-ISA funds into my ISA? I’ve been avoiding this option mainly because I had a poor understanding of how non-ISA investments are subject to tax.
But I guess the question ultimately amounts to whether I should have more exposure to the stock market sooner rather than later.
(If it’s an important factor to take into account, I’m currently 28, and if I continue with the ISA-only dripfeeding approach my portfolio won’t reach its maximum exposure to stocks as a percentage until I’m 32 or 33. I guess this does strike me as odd in the sense that, for this period, I’m gradually increasing my portfolio’s risk when generally speaking the trend ought to be the converse!)
Any advice on this would be much appreciated! Thanks!
Does anyone have any suggestions regarding the above?
Hi Rabid Mongoose / sejon,
I didn’t see your original question, I wasn’t ignoring it! That said I can’t give you personal advice really, and nor can anyone else, as we aren’t professional advisers and don’t know your full circumstances.
What’s more, without wishing to sound like an ancient Asian martial arts teacher, the answers you seek are in your question. You yourself know that you are partly asking whether you should risk more money in the market now, or continue with the approach you have hitherto been comfortable with.
I have no argument with new-ish investors holding a lot of cash but set against that, over many periods during the last 100 years of UK and US markets, you’d have done better if you’d been invested in shares than if you’d sat in cash.
I’d venture that’s even more likely today, with markets coming off a tough ten years and cash yielding very little — but there can be NO guarantees.
In terms of tax, from what you’re saying you’re not awash with income/capital gains.
You can make over £10,000 a year in capital gains without paying tax on them. Tax on dividends is also effectively zero, even outside of an ISA, if you’re not a higher rate tax payer. In contrast you’ll be paying tax on your non-ISA savings income.
Due to this fairly favorable tax regime for shares versus cash, ‘stocks and shares’ ISAs become most valuable after a good few years of investing as the gains and income start to add up (and perhaps your own salary rises) but I still think you’re doing the right thing loading up on them now, as you can’t claim unused allowances later, and they also can save you a fair bit of paperwork in some circumstances.
Hope this helps you coalesce your thinking. 🙂