Before We Begin
This site does not give financial or tax advice, speak to your accountant about your personal situation.
It simply provide the useful information at the point of publishing. If you spot a mistake, do let us know.
Today we are talking about how to invest Automatically to Maximise Captial Gains Income.
And we repeat: THIS IS NOT INVESTMENT ADVICE. Do Your Own Research Before Investing.
Capital Gains Allowances – Current UK amount is £12,000
What does this mean? I means that if you have invested in something upon which capital gains tax applies, and it appreciates in value, each year, the first £12k of the appreciation is taxed at 0%. The rest is currently taxed at 20%. We will discuss Capital Gains Losses further down.
Many People lose out and pay more Capital Gains tax because they are not taking advantage of their Annual Allowances. The annual allowance is currenty £12k a year is £1k a month NET.
Whether you have just started your first job, or have already retired, you can still take advantage of this.
Price Increases Vs Dividend Payments
For shares which pay Dividends, there are two potential sources of income: Capital Gains which we are covering here and Dividend payments which are treated like income.
Currently (2019-2020, you are entitled to earn £2k in dividend payments before being taxed. Anything above that is taxed at your highest tax rate:
- Basic-rate taxpayers pay 7.5% on dividend amount over £2k
- Higher-rate taxpayers pay 32.5% on dividends amount over £2k Income between £50,001 and £150,000 carries a 40% income tax charge.
- Additional-rate taxpayers pay 38.1% on dividends amount over £2k Income above £150,001 carries a 45% income tax charge.
It’s a good idea to keep maximising your ISA amounts, so if you haven’t maxed out your ISA, seek to move any high dividend paying investments to your ISA, where neither the Capital Gains nor the Dividend Income is taxed. You may need to sell and repurchase, which in itself may cause a Capital Gain or Loss.
The good news is that ALL Capital Gains are taxed at 20% currently. Capital Gains are calculated from the Date of Purchase to the Date of Sale, on a First In, First Out basis.
Final thoughts: If you don’t use your ANNUAL Capital Gains Allowance, you lose it.
Examples To Demonstrate Capital Gains Allowance
These are some very simple workings in isolation to demonstrate how taking your Annual Capital Gains Allowance impacts your tax position.
Person A Invests £20K in shares in Company X and takes their capital gains each year up to the maximum for 10 years.
Person B Invests £20k in shares in Company X and sells at the same price as Person A 10 years later.
Person A Takes advantage of 10 years of Capital Gains Allowances (and Losses) year on year.
Person B Only has one Capital Gains Allowance permitted when they sell.
Market scenario 1: Market Rises Year on Year, ending up in year 10 with the price 5 the purchase price. Let’s assume Capital Gains Tax Allowance raises as well and is at £20k for year 10.
Person B: Invested £20K, Value at Sale: £100k. Capital increased by £80k. Maximise allowance £20k. Capital Gains Tax at 20% is due on £60k, in other words, £12k.
Person A: Invested £20K, Value at Y1 sale: £25k (£5k gain within allowance). Value at Y2 sale: £35 (£10k gain within allowance) and so on. resulting in Value at Year 9 sale: £85k. When they sell in Year 10, their gain is £100k-£85k = £15k, which is in the capital gains allowance.
Think through other market scenarios, including some years where it shoots up or falls. You simply sell enough shares to take advantage of the profit allowance. Plus you sell to take advantage of the Capital Gains LOSSES to offset future profits.
The Bottom Line
It is worth making your money work for you efficiently, rather than you having to do all the hard work.
Make the most of Passive Income opportunities. Whether it making your cash work for you or putting in the sweat equity, there are many ways to work it!
That money give you the power and opportunity to do a world of good.
- Always Do Your OWN Research. What works for me may not work for you.
- Nothing here is Investment Advice. We are not qualified to do that. Always check the credentials and whether the opportunities will work in your country or for the citizenship you hold. Never risk money you cannot afford to lose.
- What works today may not work in one year. Laws change, allowances change. Please stay on the front of the wave.
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(c) 2020 Alison Murray. Aileana Moore Publishing Ltd. All Rights Reserved.