Tax on Investments
Overview
Other things being equal, some investments will be attractive to higher-rate taxpayers, as they can obtain higher rate tax relief on the investment. Conversely, other investments are attractive to those on lower incomes. Some investments carry tax credits which may be repayable to those on low incomes or non-taxpayers. In the same way, certain individuals can register to have interest credited to a bank or building society account paid gross, rather than deducted at source, which is normally the case. Income from investments is taxed in the same way as other income - profits from the disposal of investments and other assets may be subject to Capital Gains Tax. |
Overview |
In
choosing between the many ways of investing money, the way in which
tax is levied on the proceeds may influence the decision. Nevertheless,
tax treatment should never be the only deciding factor - a bad investment
will never be as worthwhile as a good one, even if it is Tax-free Investments
Various tax-free investments are available - an incentive offered by the Government to save in specific ways. Some are available to all and others to those whose income is under their personal allowance.
Individual Savings Account (ISA)
The Individual Savings Account replaced two previous schemes - the deposit-based TESSA and the investment-based PEP - as from April 6th 1999, to encourage long-term saving. All income and capital gains are paid tax-free. Investment in an ISA can be a mixture of cash, dividend-paying investments or life insurance policies. There are limits to the amount that can be invested in each category in a given year.
National Savings Bank Ordinary Account
Opening an Ordinary Account with the National Savings Bank (deposits between £10 and £10,000) offers two advantages over alternative accounts:
- The first £70 of interest is free of tax (any interest over this sum is taxable)
- All interest is paid gross.
Capital Gains Tax
If a capital asset - such as a shareholding - is disposed of or gifted to another, there may be a capital gain on the excess of the sale proceeds, or market value of the asset, minus any selling expenses, original cost of the asset, improvement expenses, indexation allowance (if applicable) and any taper relief.
There are additional rules where part of an asset is disposed of, where there are losses brought forward or in the year of disposal and where assets were originally held before 31st March 1982.
Annual exemption
Everyone resident in the UK is entitled to an annual exemption to set against their total capital gains in the tax year. The rate for 2000/2001 is £7,200.
Payment of tax due on capital disposals
If there is a chargeable gain, after all allowable deductions have been made, tax will be payable on this amount at either 20% or 40%, depending on the taxpayers total income for the year. The liability will be due for payment on the 31st January following the year of assessment. For any gains in 2000/2001, the tax becomes payable on 31st January 2002.
The tax paid does not form part of the calculation in determining the level of payments on account that are required for the following tax year.
In 2000/2001, gains are charged at 20% where the gains when added to total income are within the basic rate limit and 40% where they exceed that limit. Companies pay corporation tax at their normal rate.
For individuals, gains on disposals after 5th April 1998 benefit from indexation up to that date. Gains are reduced by taper relief reflecting the number of complete years after 5th April 1998. Non-business assets acquired before 17th March 1998 qualify for a bonus year of taper relief. From 6th April 2000 the holding period required to receive maximum taper relief for business assets is four years and for non-business assets is ten years.
| Years | Percentage of gain chargeable | |
| Business assets | Non business assets | |
| 0-1 | 100 | 100 |
| 1-2 | 87.5 | 100 |
| 2-3 | 75 | 100 |
| 3-4 | 50 | 95 |
| 4-5 | 25 | 90 |
| 5-6 | 25 | 85 |
| 6-7 | 25 | 80 |
| 7-8 | 25 | 75 |
| 8-9 | 25 | 70 |
| 9-10 | 25 | 65 |
| 10+ | 25 | 60 |
CGT Indexation Allowances
When calculating capital gains up to April 1998, relief is given in the form of an indexation allowance. This allowance takes into account inflation based on the Retail Prices Index (RPI).
From November 1993 the indexation allowance can only reduce an unindexed gain to nil. Prior to this it could create or increase a capital loss.
With effect from 6th April 1998 taper relief has replaced the indexation allowance (this applies to individuals only. Indexation allowance is still relevant for capital disposals made by companies), ,
The indexation allowance is calculated by multiplying the cost of the asset, any acquisition costs, and any improvement costs, by the increase in the RPI from the month in which the expenditure was incurred to April 1998. (For sales before April 1998, the increase in the RPI up to the month of sale is used.) If expenditure is incurred at different times, the indexation allowance is calculated separately on each item of expenditure.
The increase in the RPI is calculated by the formula:
| RD - RI |
|
|
| RI |
| Key: | ||
| RD = | RPI for the later of the month of disposal or April 1998 | |
| RI = | RPI for the later of the month expenditure incurred or March 1982 | |
e.g. the increase in the RPI from March 1982 to April 1998 is:
| 162.6 - 79.44 | = 1.047 |
|
|
|
| 79.44 | |
The RPI is rounded to three decimal places. If the RPI is calculated as a negative figure the increase is taken as nil.
| Retail Prices Index | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec |
| 1982 | 79.4 | 81.0 | 81.6 | 81.9 | 81.9 | 81.9 | 81.9 | 82.3 | 82.7 | 82.5 | ||
| 1983 | 82.6 | 83.0 | 83.1 | 84.3 | 84.6 | 84.8 | 85.3 | 85.7 | 86.1 | 86.4 | 86.7 | 86.9 |
| 1984 | 86.8 | 87.2 | 87.5 | 88.6 | 89.0 | 89.2 | 89.1 | 89.9 | 90.1 | 90.7 | 91.0 | 90.9 |
| 1985 | 91.2 | 91.9 | 92.8 | 94.8 | 95.2 | 95.4 | 95.2 | 95.5 | 95.4 | 95.6 | 95.9 | 96.0 |
| 1986 | 96.2 | 96.6 | 96.7 | 97.7 | 97.8 | 97.8 | 97.5 | 97.8 | 98.3 | 98.5 | 99.3 | 99.6 |
| 1987 | 100.0 | 100.4 | 100.6 | 101.8 | 101.9 | 101.9 | 101.8 | 102.1 | 102.4 | 102.9 | 103.4 | 103.3 |
| 1988 | 103.3 | 103.7 | 104.1 | 105.8 | 106.2 | 106.6 | 106.7 | 107.9 | 108.4 | 109.5 | 110.0 | 110.3 |
| 1989 | 111.0 | 111.8 | 112.3 | 114.3 | 115.0 | 115.4 | 115.5 | 115.8 | 116.6 | 117.5 | 118.5 | 118.8 |
| 1990 | 119.5 | 120.2 | 121.4 | 125.1 | 126.2 | 126.7 | 126.8 | 128.1 | 129.3 | 130.3 | 130.0 | 129.9 |
| 1991 | 130.2 | 130.9 | 131.4 | 133.1 | 133.5 | 134.1 | 133.8 | 134.1 | 134.6 | 135.1 | 135.6 | 135.7 |
| 1992 | 135.6 | 136.3 | 136.7 | 138.8 | 139.3 | 139.3 | 138.8 | 138.9 | 139.4 | 139.9 | 139.7 | 139.2 |
| 1993 | 137.9 | 138.8 | 139.3 | 140.6 | 141.1 | 141.0 | 140.7 | 141.3 | 141.9 | 141.8 | 141.6 | 141.9 |
| 1994 | 141.3 | 142.1 | 142.5 | 144.2 | 144.7 | 144.7 | 144.0 | 144.7 | 145.0 | 145.2 | 145.3 | 146.0 |
| 1995 | 146.0 | 146.9 | 147.5 | 149.0 | 149.6 | 149.8 | 149.1 | 149.9 | 150.6 | 149.8 | 149.8 | 150.7 |
| 1996 | 150.2 | 150.9 | 151.5 | 152.6 | 152.9 | 153.0 | 152.4 | 153.1 | 153.8 | 153.8 | 153.9 | 154.4 |
| 1997 | 154.4 | 155.0 | 155.4 | 156.3 | 156.9 | 157.5 | 157.5 | 158.5 | 159.3 | 159.5 | 159.6 | 160.0 |
| 1998 | 159.5 | 160.3 | 160.8 | 162.6 |