Do you know if you are liable for tax on investments you and your family hold?

Most of the time tax on investments is not paid automatically and it is up to you as an individual to ensure you are declaring the right amount of tax to HM Revenue and Customs (HMRC).

Investment companies are compelled to supply data to HMRC on a regular basis so there is always the danger that HMRC will chase you for tax they believe you owe years down the line.

What tax on investments could be due

 Investments are usually taxed in two ways:

  1. On the income they produce.
  2. On the gains you make.

Investment income

Shares and equity investment funds will produce income by way of dividends. Fixed interest investments like bonds and gilts held directly or in funds will produce interest.

Both dividends and interest are subject to Income Tax. The level of Income Tax you pay on your investment income will depend on what other income you receive e.g. salary.

One quirk to watch out for is that dividends have their own tax rate and there is a dividend allowance of £2,000 per year currently before any tax is due. Also, be aware that dividends are added on top of other income like salary and interest.

Investment property will produce income by way of rent and this income is also subject to Income Tax. If you are paying a mortgage on the property you may be able to offset some of the interest to reduce the rental income for tax purposes.

Investment gains

As well as paying tax on the income from investments you may also pay tax at the point you sell a share, fund or investment property.

If at the point of sale the value of the asset you are selling is more than what you paid for it then the difference could be subject to Capital Gains Tax (CGT).

There is a CGT allowance (currently £12,300) per person per year. So if your total gains in the year are below this, you have no tax to pay. But if they are above this allowance then you will need to add the gains to your other income.

If the total gains (minus CGT allowance) plus other income and dividends is below £50,000 you will pay 10% CGT or 18% CGT on residential property.

If the total gains (minus CGT allowance) plus other income and dividends is above £50,000 you will pay 20% CGT or 28% CGT on residential property.

What you need to determine tax on investments

To start with the easy bit. If your investments e.g. shares, investment funds or commercial property are held in ISAs or pensions then they are free of tax on income and gains whilst they remain inside these wrappers.

There will be tax to pay on withdrawals from pensions but that’s a separate topic.

For investments held outside an ISA or pension how you manage the tax will depend on whether you use an investment provider

For example, if holding shares or funds on an internet platform like Hargreaves Lansdown they should provide you with an annual tax certificate detailing your income and gains made throughout the tax year. If you don’t receive one, chase the provider.

This then allows you to use this data to complete a self-assessment tax return to HMRC.

If you hold shares and/or property directly without using a management company then it is up to you to keep your own records of income and gains. You will still then need to declare this on a self-assessment tax return.

Whilst many people may decide to manage their investments themselves it’s important that you are comfortable understanding the rules and your responsibilities. You don’t know what you don’t know and mistakes can be expensive.

If you would like us to carry out an overview of your investment tax position including areas where tax could be saved then please secure a free 15-minute video call with us. You can speak to a Chartered Financial Planner who will listen to your situation, give you an outline of what you need to consider and guide you in the right direction.

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.