CAPITAL GAINS TAX ON INVESTMENTS

A reduction in capital gains tax on investments has been announced, and will apply from 6th April 2016. The capital gains tax on investments will reduce to 10% or 20%, from the previous rates of 18% or 28%. No change has been made to the capital gains tax rate on residential investment property, which remains at 18% or 28%.

The tax rates in this post have been updated to reflect the 2017/18 tax year.

Key points

  • Capital gains tax on investments to reduce to 10% or 20%
  • Capital gains tax on residential investment property to remain at 18% or 28%
  • How much capital gains tax will investments save?
  • Which products attract the new capital gains tax on investments?
  • New trustee capital gains tax rate of 20%
  • No change to entrepreneur’s relief on the sale of a business – capital gains tax remains at 10%

How does capital gains tax on investments work?

When you dispose of most investments (by selling them, giving them away, or switching investment funds) you could become liable to capital gains tax on any gains. Each person has a tax-free capital gains tax allowance of £11,300 per tax year (2017/18 tax year). Gains up to that level are tax-free. Any gains over that figure are added to your income for the tax year. The balance that sits in the 20% income tax band was taxed at 18% prior to 6th April 2016. This 18% rate will now reduce to 10%. Gains which take you into the 40% income tax band were previously taxable at 28%. This will now reduce to 20% from 6th April 2016.

Residential property – an important exception

If you sell your main residence this is exempt from capital gains tax. For residential investment property gains (buy to let), the tax rates remain unchanged at 18% or 28%. Therefore, the change to capital gains tax on investments only applies to non-property.

How much capital gains tax will investments save?

Clearly, the reduction in capital gains tax benefits investments but not property. See the table below, which shows the reduction in capital gains tax on investments vs property, when examining a gain of £50,000.

capital gains tax on investments table

Which products attract the new capital gains tax on investments?

Generally, the new capital gains tax on investments applies to the following:

  • General investment accounts
  • Unit trusts
  • Investment trusts,
  • Exchange traded funds (ETFs)
  • Shares
  • fixed interest securities (corporate bonds and gilts)

Importantly, you do not currently pay capital gains tax on investments like ISAs or pensions.

New trustee capital gains tax rate

If you generate capital gains within a trust you will now pay a reduced rate of tax at 20%, down from the previous rate of 28%. Each trust still has the £5,650 annual allowance for capital gains, at which capital gains tax is zero.

Entrepreneur relief

When you sell a business, provided you meet certain conditions, you can qualify for a reduced rate of capital gains tax on the profit from your business sale. This remains unchanged at 10% of the capital gains.

Conclusions

Clearly, this reduction in capital gains tax on investments is a welcome boost for the UK investment market, and stock market. If you are considering property vs investment, this may further tip the balance towards investing. Regular management of your investments such as our Investment Management service can further reduce or eliminate capital gains in your investments, by careful rebalancing of your portfolio. Contact us to review your investments.

The following two tabs change content below.

Dan Woodruff

Certified Financial Planner & Chartered Wealth Manager at Woodruff Financial Planning
Financial Planning helps you to navigate and anticipate significant life changes. I want to help you to ensure your money is managed wisely to give you the financial security that will fund the future and lifestyle that is important to you.

Latest posts by Dan Woodruff (see all)