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totally naive about how to pay correct tax on gains in shares

Practical Issues
agomez
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totally naive about how to pay correct tax on gains in shares

#276459

Postby agomez » January 10th, 2020, 3:48 pm

Dear all,
first post go easy! yes I am pretty naive about taxes but please advise re UK tax system. Lets say I earn 70k gross direct from employer.... a calculator suggests after deductions I would pay roughly 15.5k in tax and £57.5k.

OK lets say I invest 20k of this in shares this year (not in ISA just normal account), and it grows 50% (unlikely but hey) to 30k, and I return 30k to my account this year, what is due?

I think it is only CGT of 20% on the 10k , ie 2k, but I am confused by this site (money couk >> how-are-investments-taxed ) which says income tax is payable on any investment.....
"Income tax...You will have income tax deducted from any profits or interest you make on your investments*, just like with normal savings accounts"

So do I have to pay tax again on the 8k I "earned" though growth.....in addition to capital gains of 2k because my total income for the year is 57.5+10k...in which case I would be taxed at source, taken on share purchase, taxed on capital gains and taxed on *income thru growth*. This sounds ludicrous. It's the last bit thats most confusing me.

thanks
AG


Salary SummaryView % Yearly
Gross Pay £70,000.00
xTax free allowance £12,509.00
Total taxable £57,491.00
Total Tax due £15,496.40
Invested £20,000
Growth £10,0000
GCT £2000
any other taxes??

scrumpyjack
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Re: totally naive about how to pay correct tax on gains in shares

#276461

Postby scrumpyjack » January 10th, 2020, 3:55 pm

You have a 12,000 capital gains allowance in 2019/20 tax year so the first £12,000 of gains are tax free.

If your capital gains are less than the annual allowance and your total proceeds are less than 4 x the allowance (ie £48,000) you don't even need to put anything on your tax return.

If your shares are held in an ISA there is no tax at all and nothing goes on the tax return.

Alaric
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Re: totally naive about how to pay correct tax on gains in shares

#276465

Postby Alaric » January 10th, 2020, 4:00 pm

agomez wrote:"Income tax...You will have income tax deducted from any profits or interest you make on your investments*, just like with normal savings accounts"


I suggest you ignore that site as it does not appear to be describing correctly how the UK tax system now operates.

There are various exemptions from tax on investments.

On savings income, the first £ 1,000 is free of tax, £ 500 for higher rate tax payers.
On dividend income, the first £ 2,000 is free of tax and thereafter at 7.5% (32.5% for higher rate tax payers)
On capital gains, there's an annual tax free allowance of £ 12,000 on realised gains.

In addition to all this, someone without earned income can take advantage of the Personal Allowance, the amount that can be earned without paying tax.

There's also the ISA allowance, £ 20,000 can be invested per year into an account on which no tax is payable.

With all these allowances, you have to be really quite well off to pay any tax in the UK on interest, gains and dividends.

Chrysalis
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Re: totally naive about how to pay correct tax on gains in shares

#276485

Postby Chrysalis » January 10th, 2020, 5:02 pm

In case it’s not obvious from the above, the growth in the share’s value (capital gain) is taxed differently from any income the share produces in the form of dividends.

JohnB
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Re: totally naive about how to pay correct tax on gains in shares

#276487

Postby JohnB » January 10th, 2020, 5:11 pm

OP, remember that shares return value both as dividends (first £2k free, then add to your earned income, you can use personal allowance) and capital gains (first £12k free, no personal allowance allowed).

Shares typically return 1% over inflation in capital gains long term, so say 3.5% a year, so most people can avoid paying CGT by selling a fraction every year. Don't wait a decade and get caught out, as the allowance is use it or lose it.

BTW, be careful if you sell shares and buy the same ones back within a month hoping to defuse capital gains. This is called Bed&Breakfasting, and is not allowed.

swill453
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Re: totally naive about how to pay correct tax on gains in shares

#276488

Postby swill453 » January 10th, 2020, 5:12 pm

Chrysalis wrote:In case it’s not obvious from the above, the growth in the share’s value (capital gain) is taxed differently from any income the share produces in the form of dividends.

And also, in case it's not clear, you're not liable to pay capital gains tax unless and until you sell the shares.

Scott.

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Re: totally naive about how to pay correct tax on gains in shares

#276505

Postby XFool » January 10th, 2020, 6:20 pm

JohnB wrote:BTW, be careful if you sell shares and buy the same ones back within a month hoping to defuse capital gains. This is called Bed&Breakfasting, and is not allowed.

Can you not sell shares (outside an ISA) and buy them back within a month inside an ISA? 'Bed & ISA'?

PinkDalek
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Re: totally naive about how to pay correct tax on gains in shares

#276521

Postby PinkDalek » January 10th, 2020, 7:17 pm

agomez wrote:[OK lets say I invest 20k of this in shares this year (not in ISA just normal account), and it grows 50% (unlikely but hey) to 30k, and I return 30k to my account this year, what is due?

I think it is only CGT of 20% on the 10k , ie 2k, but I am confused by this site (money couk >> how-are-investments-taxed ) which says income tax is payable on any investment.....
"Income tax...You will have income tax deducted from any profits or interest you make on your investments*, just like with normal savings accounts"


Not only is that webpage https://www.money.co.uk/guides/how-are-investments-taxed.htm poorly worded, it is also out of date, having last been updated on 28 December 2018. As others have said the CGT Annual Exempt Amount is now £12,000 per annum (for the current tax year 2019-2020) as can be confirmed here https://www.gov.uk/capital-gains-tax/allowances.

If the disposal you mention is the only disposal in the tax year then there's no CGT to pay, as your chargeable gain (subject to the deduction of disposal expenses etc) is only £10,000.

Incidentally "return to my account" is strange wording but I've taken that to mean you disposed of (sold) your entire holding and effectively cash in.

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Re: totally naive about how to pay correct tax on gains in shares

#276522

Postby Lanark » January 10th, 2020, 7:19 pm

One more thing, if you are lucky enough to buy some shares which FALL in value, if you sell them in the same year as selling other shares at a profit - you only get taxed on the total overall profit.

PinkDalek
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Re: totally naive about how to pay correct tax on gains in shares

#276523

Postby PinkDalek » January 10th, 2020, 7:20 pm

XFool wrote:
JohnB wrote:BTW, be careful if you sell shares and buy the same ones back within a month hoping to defuse capital gains. This is called Bed&Breakfasting, and is not allowed.


Can you not sell shares (outside an ISA) and buy them back within a month inside an ISA? 'Bed & ISA'?


I think you know the answer but the OP stated not in ISA just normal account, although he could, of course consider Bed and ISAing.

There is, of course, no law against Bed & Breakfasting. The CGT implications are relevant though.

PinkDalek
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Re: totally naive about how to pay correct tax on gains in shares

#276524

Postby PinkDalek » January 10th, 2020, 7:22 pm

Lanark wrote:One more thing, if you are lucky enough to buy some shares which FALL in value, if you sell them in the same year as selling other shares at a profit - you only get taxed on the total overall profit.


... and potentially lose the benefit of the Annual Exempt Amount. Timing of disposals is relevant where CGT is concerned.

Alaric
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Re: totally naive about how to pay correct tax on gains in shares

#276526

Postby Alaric » January 10th, 2020, 7:24 pm

XFool wrote:Can you not sell shares (outside an ISA) and buy them back within a month inside an ISA? 'Bed & ISA'?


It can be done on the same day to transfer to an ISA.

The point about repurchase within a month is not that it isn't legal, but that the periods of ownership are linked for CGT.

It doesn't apply to trackers, so you could sell an ETF tracker from provider A, repurchase the same index as an ETF from provider B and thus crystallise the gain for CGT.

agomez
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Re: totally naive about how to pay correct tax on gains in shares

#276579

Postby agomez » January 10th, 2020, 10:08 pm

thank you all very useful!

yes I will likely come in under those limits......however if in the future I went over my capital gains allowance (12k) from share growth or share dividends and did not leave it with the broker, but cashed out, AND I was in a higher income tax bracket, would the gains ALSO be taxed by both capital gains tax (and possible dividend tax) and income tax on the growth that year??

ps. sorry for my terminology by "return to my account" . I meant sell and then cash out of the broker share account and transfer to current account....is there a difference between selling and seeing the cash in the brokerage account and seeing the cash in your current account for tax purposes?

JohnB
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Re: totally naive about how to pay correct tax on gains in shares

#276580

Postby JohnB » January 10th, 2020, 10:14 pm

I suggest you read https://www.gov.uk/capital-gains-tax/rates. You pay CGT on capital growth, income tax on dividends, best not to use the vague word "growth". And its when you sell, not when you move cash around

Dod101
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Re: totally naive about how to pay correct tax on gains in shares

#276582

Postby Dod101 » January 10th, 2020, 10:17 pm

XFool wrote:
JohnB wrote:BTW, be careful if you sell shares and buy the same ones back within a month hoping to defuse capital gains. This is called Bed&Breakfasting, and is not allowed.

Can you not sell shares (outside an ISA) and buy them back within a month inside an ISA? 'Bed & ISA'?


You can do anything you like within reason but you will need to pay CGT if selling the shares outside an ISA brings you within the CGT orbit ie if any gain exceeds the CGT allowance.

Dod

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Re: totally naive about how to pay correct tax on gains in shares

#276587

Postby swill453 » January 10th, 2020, 10:29 pm

agomez wrote:is there a difference between selling and seeing the cash in the brokerage account and seeing the cash in your current account for tax purposes?

No, it's simply the selling that counts.

Scott.


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