Tax and Investing

“In this world nothing can be said to be certain, except death and taxes.” Benjamin Franklin

But investing for your future doesn’t have to be taxing.  By using a tax-efficient account you’ll pay only the tax you need to – which could be none at all. And that tax-free growth means your money will grow faster.  So, whilst you may have paid tax on the money you save and invest, or pay tax further down the line when you start to draw on those assets, the growth and income that you gain in an ISA account will be working for you rather than for the tax man.

Here’s our round-up on the key aspects of tax on investing.  We’re not tax advisers, so it’s based on our understanding of the current arrangements for tax rates, limits and allowances, all of which may change. It’s also important to bear in mind that their value to you will vary according to your personal circumstances. If you’re not sure how tax affects you, we’d recommend you get speak with a tax adviser. You can also get further information from the personal tax section of the Government and HMRC websites.

There are four main ways taxes affects investors:

1. Income Tax:                      

Income you earn from most investments forms part of your taxable income. Investment income could push you into a new tax bracket - but where that income is earned in an ISA account or Pension, including SIPPs, it won’t.

Dividends are taxed at source, a deduction which can’t be reclaimed. But in an ISA or pension there’s no further tax due, giving you valuable savings of up to 27.5%.

Income Tax bands (higher personal allowances apply to persons born before 5 April 1948)

Tax rates
2016/17 income band2017/18 income bandIncome Tax rate
Personal allowanceFirst £11,000
First £11,5000%
Basic rate tax£11,001- £32,000£11,501 - £45,00020%
Higher rate tax

£32,001 - £150,000

£45,001 - £150,00040%
Additional rate taxOver £150,000Over £150,00045%
Dividend allowance Tax rate payable on dividends over £5,000  
Basic rate 7.5%7.5% 
Higher rate tax32.5%32.5% 
Additional rate tax38.1%38.1% 
Personal savings allowance   
Basic rate taxpayers £ 1,000£1,000 
Higher rate tax£500£500 
Additional rate tax£0£30 

All tax payers - The starting rate for savings is a maximum of £5,000. Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.

2. Capital Gains Tax (CGT)

Capital Gains Tax (CGT): gains you make (the difference between you purchase cost and your sale value) over and above the annual CGT threshold are subject to tax.

Gains over and above your annual allowance are taxable. Invest via an ISA or SIPP and they aren’t.

  2016/17 2017/18
CGT allowance (the ’Annual Exempt Amount’) £11,100 £11,300
Tax rate for gains which, when added to taxable income, fall within the:
Basic rate tax band 18% on all gains 10% / 18% on residential property
Higher or additional rate tax band 28% on all gains 20% / 28% on residential property
NOTE: ‘residential property’ excludes your home, subject to meeting the specified criteria
Some losses, including losses on investments, can be offset against gains in general. You can claim losses up to 4 years after the end of the tax year in which you disposed of the asset.

Further details about CGT  

3. 'Purchase' taxes

Stamp Duty on UK shares and Investment Trusts settled through CREST is 0.5% of the purchase value (1.0% on Irish shares). It is shown separately on your contract note and added to the total purchase cost.

(When you buy shares via a stock transfer form and the value is £1,000 or more, the duty is 0.5%, rounded up to the nearest £5.00.)

It does not apply to ETFs, Funds or fixed income investments such as Bonds, or when you subscribe for new shares in a company.  Neither does it apply to shares listed on a ‘recognised growth market’, such as AIM or ISDX.

Stamp Duty Reserve Tax (SDRT) of 0.5% on Unit Trusts and OEICs - otherwise known as Funds. It is paid by the trust or fund company and included within the price you pay for the purchase.

SDRT is also payable when you take-up rights or options.

Financial Transaction Tax (FTT of up to 0.2% is payable on the purchase of some European equities (large-cap shares in France and Italy at present, although nine more countries are set to join). It is added to the purchase cost.

PTM levy, a flat £1 charge on UK equity purchases and sales of £10,000 or more. It is used to help fund the work of the Takeover panel.

VAT may be payable on fees charged for the provision of services, such as for the administration of an account.

4. Inheritance Tax

Assets that are passed on following death may be subject to Inheritance Tax.  And that can also include gifs you have made during your lifetime.

The basic numbers are:

Inheritance tax:2015/16 and 2016/17
Threshold£325,000 (The balance of a husband, wife or civil partner’s allowance can be utilised on death of the surviving party.).

If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren, your threshold will increase to £425,000.

Annual exemption for gifts in tax year£3,000 (can be carried over from one previous tax year, to a total of £6,000)
Wedding & Civil Partnership  gifts, given shortly before or on the event.Up to £5,000, depending upon relationship with the recipient
Regular gifts from taxed income (e.g. payments into a savings account)No tax due so long as the donor had sufficient income remaining to sustain their normal lifestyle.
Tax rateup to 40% depending upon when the gift was given (36% where 10% or more of the estate is left to charity
Other exemptions: 
Pension fundsFrom 6 April 2015, on death before age 75, monies in a pension fund are passed free of tax to beneficiaries when they take the money via an annuity or drawdown.
ISA Accounts
Since 3 December 2014, where a person holding an ISA dies and that person was married or in a civil partnership, the surviving spouse/civil partner (even where the spouse/civil partner does not actually inherit the ISA).  This is referred to as the Additional Permitted Subscription

Further details about Inheritance Tax 

Opening an account is easy and you will need:

  • Your address details for the last three years
  • Your debit card details including bank account number and sort code
  • Your National Insurance (NI) number

Open an account

Please be aware of the risks involved. The value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. Past performance is no guarantee of future performance. Tax treatment depends on your individual circumstances and may be subject to change. If in any doubt, please seek advice.

Got an ISA already?

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If you already have ISAs elsewhere, you can bring them all together with us. Having your investments together in one place is not just convenient, it makes good sense too as you’re better able to manage your overall portfolio.

With our simple, flat fee charging structure, it’s cost-effective too - we don’t penalise our customers for holding more investments with us, or charge more as the value of those investments grow.  

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