CAPITAL GAINS TAX ON INVESTMENTS
This article explains how capital gains tax on investments works and also includes comparisons to the old capital gains tax rates prior to April 2016.
- Capital gains tax on investments reduced to 10% or 20%
- Capital gains tax on residential investment property remained 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 £12,300 per tax year (2020/21 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 has now reduced to 10%. Gains which take you into the 40% income tax band were previously taxable at 28%. This reduced 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 (based on 2016/17 when this article was published).
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)
- 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 £6,150 annual allowance for capital gains, at which capital gains tax is zero.
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.
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.
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