When it comes to investing, there are multiple variables to consider that could have an impact on investments. However, none more so than taxes. Being tax aware when investing is key to ensuring your capital doesn’t disappear due to inefficient tax management. This article will shine a light on taxes that all investors should be vigilant of, in order to receive the best returns.
Capital gains taxes
In short, Capital Gains Tax is payable on the profit you receive when you sell or dispose of an asset that has increased in value. Each individual receives a tax free allowance of £12,000 per year (and £6,000 for trusts). However, with many investors breaching this tax-free limit, understanding Capital Gains Tax is key.
Investors who sell shares, funds, trusts or other financial products will either be charged a 10% or 20% CGT rate on their investment/s. Capital Gains Tax is not paid on the following:
- Shares in an ISA
- Shares in a PEP
- Shares in SIPs
- Government guilts
- Premium bonds
- Corporate Bonds
- Some employee shareholder shares
To decipher where you need to pay Capital Gains Tax, you will typically need to calculate the different between what you paid for your investment and what you sold or disposed of it for.
If you are an investor with shares in a company you will likely receive a dividend payments. For this tax year the dividend allowance is £2,000. If you were to reiceve a dividend payment above this amount, you will be taxed at one of the following rates:
|Tax band||Tax rate on dividens above £2,000|
Therefore, if you received a £10,000 dividend payment you will be taxed on the £8,000 above the threshold. If you are in the higher rate tax band (32.5%), you will need to pay £2,600 in tax, leaving you with £5,400. For dividens over £10,000, a Self Assement tax return will need to be filled in and investors will need to reigester by 5th October following the tax year the dividend payment was received.
Investors who receive revenue from lending their money or investing in a product, will receive an income. This income is typically taxable and recorded as and when it is earned, as opposed to paid. Investors will need a clear understanding of the investment terms and conditions to accurately track the tax payable on interest income. Being aware of the interest rate, compound period and investment balance of all applicable investment opportunities is key.
Anybody who buys a second home or buy-to-let property will be subject to stamp duty. Stamp duty is a tax that forms a component of state revenue. Investors who purchase a property under £125,000 will not have to pay any stamp duty.
|Property price||Stamp Duty %|
|Up to £125,000||Zero|
|£125,001 to £250,000||2%|
|£250,001 to £925,000||5%|
|£925,000 to £1.5 million||10%|
|Above £1.5 million||12%|
For example, if an investor were to purchase a £500,000 property they would have to pay stamp duty on £375,000. This is charged at 5%. Therefore, £18,750 would need to be paid in stamp duty tax when the purchase has been completed. Investors have 14 days to complete this but it is often handled by a solicitor.