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Taxation of S&S

Investment discussion for beginners. Why you should invest your money, get help getting started
Cookie
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Taxation of S&S

#126846

Postby Cookie » March 21st, 2018, 7:31 pm

I am just looking into this but would appreciate any pointers?

I believe any gain is treated as a Capital Gain and Dividends under the Income Tax rules for dividends

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Re: Taxation of S&S

#126863

Postby Urbandreamer » March 21st, 2018, 8:42 pm

It can get more involved if dealing with non UK shares, but you have the jist.

If possible I recommend seeking a tax shelter to avoid paperwork. Ie an ISA or a SIPP.

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Re: Taxation of S&S

#127145

Postby Cookie » March 22nd, 2018, 2:58 pm

Can I check some figures?

If CGT allowance is £11,700 and assuming a 8% return (is that reasonable?) on investments not in a tax wrapper

Then if able to in some way bed and breakfast (spouse/ISA/buy similar alternative)

£11,700/8% = £146,250

So approx £150k of investments could receive a 8% CG per year without having to pay any CGT?

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Re: Taxation of S&S

#127165

Postby Lootman » March 22nd, 2018, 3:32 pm

Cookie wrote:Can I check some figures? If CGT allowance is £11,700 and assuming a 8% return (is that reasonable?) on investments not in a tax wrapper. Then if able to in some way bed and breakfast (spouse/ISA/buy similar alternative)
£11,700/8% = £146,250

So approx £150k of investments could receive a 8% CG per year without having to pay any CGT?

The calculation might be reasonable but I don't think the assumption is. The long-term return from shares is something like 8% or 9%, but some of that is dividends. I've seen the figure before that about 40% of returns are from dividends.

Those dividends are taxed differently of course, but that leaves the average annualised capital gain as something close to 5%. On that basis you'd need over 200K invested for CGT to be a worry.

But of course you won't get 8% pa evenly. Your first two years might be down years and then you will "waste" those annual allowance. Then you get a 24% gain. Or you may get inconvenient corporate actions that cause a CGT event.

Having a CGT liability is ultimately a good thing. If you had 1.2 million invested then a 1% daily move would accrue more than your annual CGT allowance. But you might not mind.

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Re: Taxation of S&S

#127167

Postby Urbandreamer » March 22nd, 2018, 3:37 pm

CGT needs a bit of work.

Which is why I advised trying to avoid the complication.

In simple terms you need to know what you paid for any given share or other asset at the time that you sell them (or bed-n-isa them).
CGT is only due when you sell.
If you inherited them then it is taken that you "bought" them at that time.
There is no indexing any more (so in my opinion it's a tax on inflation).
You can offset gains against losses.
You can carry losses forward though I'm not sure how you go about it.

Do the sums and if the gain comes to more than the allowence that year, then you need to pay tax.
Next year you start again.

The allowence is use it or loose it.

You can't contribute more than about £20k to a ISA in any given year, so it would take a number of years to transfer £150k into a ISA.

ISA's are free from CGT or dividend tax. Hence even if you have £1000K in your ISA, as some do (ie Lord Lee), there will be no CGT or dividend tax to pay.

https://www.telegraph.co.uk/finance/per ... uying.html

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Re: Taxation of S&S

#127170

Postby Alaric » March 22nd, 2018, 3:40 pm

Cookie wrote:If CGT allowance is £11,700 and assuming a 8% return (is that reasonable?) on investments not in a tax wrapper


You win some and lose some. Some shares can double, triple in value or more whilst others halve or worse. But in general you have to have a chunk of assets and for them to do well before you run into serious CGT taxation problems. You can always sell part of a holding, which is an advantage for CGT management of shares as opposed to ownership of property.

If you want to continue holding a share, then you bed and breakfast. Otherwise you just take the profit and reinvest into something else, as you suggest.

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Re: Taxation of S&S

#127201

Postby Lootman » March 22nd, 2018, 4:42 pm

Urbandreamer wrote:There is no indexing any more (so in my opinion it's a tax on inflation).

To be fair, when Brown removed the ability to index gains he also dramatically cut the rate of CGT payable from 40% to 18%, subsequently reduced further to 10% for basic-rate taxpayers.

Under the old rules I believe that 10% was the lowest rate you could index down to anyway, so the situation is not nearly as bad as appears. And of course we don't have to do all those pesky calculations any more.

In fact I would go as far as to suggest that, if you are a basic rate taxpayer, then taking gains and paying 10% tax on them (*) is probably about as good as it gets, and might be prudent if you think a future Labour government would increase CGT rates, which they likely might do.

(*) Being careful that it doesn't push you into a higher tax bracket of course

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Re: Taxation of S&S

#127270

Postby Chrysalis » March 22nd, 2018, 7:12 pm

I don’t think CGT can push you into a higher tax rate, can it??
I thought the rate was based on your highest marginal rate for income tax. Gains are never income, are they?
I could very well be wrong.

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Re: Taxation of S&S

#127273

Postby PinkDalek » March 22nd, 2018, 7:17 pm

Jabd2001 wrote:I don’t think CGT can push you into a higher tax rate, can it??
I thought the rate was based on your highest marginal rate for income tax. Gains are never income, are they?
I could very well be wrong.


See https://www.gov.uk/capital-gains-tax/rates which includes:

If you pay basic rate Income Tax

If you’re a basic rate taxpayer, the rate you pay depends on the size of your gain, your taxable income and whether your gain is from residential property or other assets. ... If this amount is within the basic Income Tax band you’ll pay 10% on your gains (or 18% on residential property). You’ll pay 20% (or 28% on residential property) on any amount above this.


So, yes, the gains can't push you into a higher rate of Income Tax but they can push you into a higher rate of CGT.

PD - idly wondering why this Topic isn't at Taxes

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Re: Taxation of S&S

#127291

Postby Chrysalis » March 22nd, 2018, 8:18 pm

Thanks PD. I don’t think I’d appreciated that.

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Re: Taxation of S&S

#127400

Postby GeoffF100 » March 23rd, 2018, 8:35 am

Over the long term history of the UK stock market, the capital value value has roughly kept pace with inflation, and the total return has been the dividend yield. Overseas shares pay out less of their returns as dividends and more as capital gains. Nonetheless, the actual capital return you will receive is totally unpredictable. When I last looked the long term inflation rate implied by the gilt market was about 3%. £11,700 / 0.03 = £390,000. As a rough rule of thumb, £250K of directly held UK shares probably will not give you CGT problems, but £500K probably will do so at some point. The risk here is that a company will be overtaken for cash, landing you with a large capital gain, and you will not have enough losses to offset against that gain.

If you hold your shares in a long lived fund, however, you should not have a problem. A capital gains tax event occurs only if you sell some of your units in the fund, and there is currently no capital gains tax on death. Large Vanguard trackers are likely to be long lived. The Globe Investment Trust, on the other hand, was bought out for cash, so you need to be careful here.

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Re: Taxation of S&S

#127415

Postby Chrysalis » March 23rd, 2018, 9:14 am

Well surely it depends on what you do with the capital? If you're just spending thr income and maybe topping up by selling a few units, then that's fine.
If you want to spend a big lump sum (say to buy a house) then that's a different matter. It's quite easy to build up gains in excess of the annual allowance if you have six figures in s taxable account.

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Re: Taxation of S&S

#127427

Postby JohnB » March 23rd, 2018, 9:40 am

Four points

1) If you dispose of things worth more than 4*annual CGT allowance, you need need to declare the gain, even if its under the limit. If disposing of less, you have no obligation to declare it unless tax is due

2) The B&B rules that stop you selling and buying back the same asset the next day do not apply to different trackers of the same index, as they are considered different assets due to their minor variations in holding.

3) I always aim to churn enough to use up my CGT allowance each year. You never know when you might need to liquidate your whole holding (to buy a new house before selling the old, for example), and you don't want to be caught out.

4) Regular investments and ACC units are the bain of CGT, as they make the calculations a lot more fiddly.

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Re: Taxation of S&S

#127435

Postby Chrysalis » March 23rd, 2018, 9:59 am

I also aim to sell every year to use the CGT allowance, but it does mean I end up with more holdings than I’d like. Ideally I would have everything in one all in one index tracker and never touch it, but dealing with the distributions and the CGT management quickly make it all a bit more complex. I think I have got it down to 6 or 7 holdings in taxable accounts, and that is quite enough to be keeping track of!

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Re: Taxation of S&S

#127441

Postby tjh290633 » March 23rd, 2018, 10:09 am

Move as much as you can into ISAs each year. At £40k or so for a couple that only takes 25 years to protect £1 million.

TJH

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Re: Taxation of S&S

#127442

Postby GeoffF100 » March 23rd, 2018, 10:10 am

Jabd2001 wrote:Well surely it depends on what you do with the capital? If you're just spending thr income and maybe topping up by selling a few units, then that's fine.
If you want to spend a big lump sum (say to buy a house) then that's a different matter. It's quite easy to build up gains in excess of the annual allowance if you have six figures in s taxable account.

I am not at all sure that using equities outside a tax shelter to build up a lump sum to buy a house is at all realistic. The variability of equity returns over a decade or two is very large. Investing in equities makes much more sense if it is a lifetime investment. You can currently stash away £20K pa in an ISA. That is £200K after 10 years, even without any return on your money. That should be enough for a deposit on a house. CGT on unsheltered equity investments is currently not likely to be a problem unless you have a very large lump sum, or have a very large disposable income.

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Re: Taxation of S&S

#127517

Postby Lootman » March 23rd, 2018, 1:04 pm

GeoffF100 wrote:Over the long term history of the UK stock market, the capital value value has roughly kept pace with inflation, and the total return has been the dividend yield.

I believe that shares have given a positive real return over most time periods. A way to look at it is that there are three components to the return from shares - the dividend, the inflation component and the real return.

So if we assume a long-term average annualised return of 9% then we might speculate that it might be composed of (say) 3% dividends, 3% inflation and 3% real return.

If shares really did no more than match inflation then I don't think investing in them would be so popular.

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Re: Taxation of S&S

#127537

Postby GeoffF100 » March 23rd, 2018, 2:03 pm

If you go back to the inception of the UK stock market, the capital return has matched inflation quite closely, but it depends on the end point you choose. We are now at near an all time high, so I expect that there has been a positive return to this point. Dimpson et al estimated the equity risk premium to be about 3.5%. Current bond yields are about 2%, so that equates to an expected return of 5.5%. The FTSE 100 is forecast to yield 4.4% next year, so the expected capital growth is about 2%, which is less than the expected inflation rate. You could be more optimistic and assume an equity risk premium of 4.5%, but the capital growth would still only be expected to match inflation. Of course, nobody has any idea what the actual capital growth will be, but there is no reason for great optimism starting from here.

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Re: Taxation of S&S

#127674

Postby Chrysalis » March 23rd, 2018, 8:02 pm

@geoff your post reminds me of the old joke about asking for directions, and the sage answers ‘well, I wouldn’t start from here’!

There are many reasons why someone may end up with six figures in a taxable account and therefore a managing CGT issue!

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Re: Taxation of S&S

#127683

Postby GeoffF100 » March 23rd, 2018, 8:52 pm

Historically, the situation was different. The allowances for ISAs and their predecessors were much smaller. They often had high costs. There were more onerous restrictions on the investments that could be held. Sometimes the benefits were less than they are now. Nobody knew whether the benefits would be watered down or abolished. Nobody expected the recent pension reforms. Finally, of course, on a more personal level, people needed money for other purposes.

Six figures is not usually enough to give CGT issues. With good management, people get well into seven figures without hitting trouble. However, if the returns from your unsheltered investments exceed your allowances, the "problem" is not going to get any better. Nonetheless, the problems of having too much money are greatly preferable to those of not having enough. Money paid in taxes is not money wasted. It goes to the public good.


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