CGT Considerations on Investments | Brand Financial Training (2024)

Capital Gains Tax Considerations on an Investment Account

Posted by The Team at Brand Financial Training on June 21, 2016 in AF4, financial advisers, R03, Taxation
Last updated on January 20th, 2020 at 5:58 am

CGT Considerations on Investments | Brand Financial Training (1)

Using a partner’s lower tax status is now less attractive than it used to be for capital gains tax planning. However there are still two personal tax allowances that can be used. Note the 2016/17 changes are examinable by the CII from 1 September 2016.

Written by Mark Underdown

Here’s the new situation:

CGT Considerations on Investments | Brand Financial Training (2)

The Basic rate taxpayer rules require a little more attention.

Capital Gains Tax for Basic Rate Taxpayers

The process to follow for calculating capital gains tax for basic rate taxpayers is as follows:

  1. Calculate taxable income – This is your income, less your personal allowance, less income tax reliefs.
    E.g. If you earn £30,000, you deduct your personal income tax allowance of £11,000 to give you £19,000 in taxable income.
  2. Work out taxable gains – basically realised gains (caused by disposals) less any losses.
    E.g. You invested £100,000 into a fund and sold it for £130,000, realising £30,000 in capital gains.
  3. Deduct the tax-free allowance – The personal tax-free allowance for 2016-17-tax year is £11,100.
    So using the above example you deduct £11,100 from £30,000, leaving you with £18,900 that will be liable for capital gains tax.
  4. Add this figure to your taxable income (calculated in step one).
    Using the figures outlined above, you add £18,900 in gains to £19,000 in taxable income to give you a total figure of £37,900.
  5. Refer to the basic rate tax band–The basic rate tax band is £32,000 in the 2016/17-tax year (£11,000 – £43,000).
    Any gains within this band are taxable at 10%. Any gains above this are taxed at 20%.
    So in my example, £5,900 would be taxable at 20% (£37,900 less £32,000). The remaining £14,000 will be taxable at 10%.
  6. Calculate tax to pay.
    So the total tax paid on the £30,000 realised gain would be calculated as follows:
    £11,100 at nil rates
    £14,000 at 10% equals £1,400
    £5,900 at 20% equals £1,180
    Total tax equals £2,580 (or an effective capital gains tax rate of 8.6%)

Beyond the Numbers

So I’ve covered off the math behind the capital gains tax rules, but there are other more subjective factors, when considering tax planning for our clients. If it were as simple as putting numbers into a calculator, we’d probably be all out of a job!

Here are some factors that should be considered when setting up an investment account (by investment account, I mean a platform which holds Unit Trusts/OEICs – usually called General or Collective Investment Account etc).

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Double Up Personal Allowance

It’s now really important to use up both personal allowances, meaning that £22,200 becomes free from capital gains.

Bed & ISA

Common tax planning of investments would be to gradually move these funds into ISAs each year, using up the available ISA allowances.

With the ISA wrapper from 2017/18-tax year being £20,000 per person, the amount that can be gradually moved into these tax efficient vehicles is becoming more attractive.

Remember that if you do this, you could realise a capital gain. If you invest in joint names, however, you get double the personal allowance and therefore reduce the likelihood of having to pay any capital gains tax if you Bed & ISA.

You’d actually need a gain of over 55.5% in one year for this to become a CGT issue, but it would be 27.5% if only one single personal allowance was used for the original investment.

Future Access/Encashment

In the future, are there going to be gradual withdrawals or is it likely to be a one off encashment? At the very least, you can usually rely on staggering across two tax years to scoop up extra personal allowances, but a future lump sum encashment is a very different tax scenario to making gradual withdrawals.

If you are making gradual withdrawals, you can use the personal allowance each year, but if you are realising a one-off gain, it becomes much more likely that capital gains tax will need to be paid (bring back taper anyone?).

Fund/Portfolio Structure

Are you naturally realising gains along the way, or are they being essentially stored up for the future? By this, I mean, are you investing in a discretionary portfolio where funds will be bought and sold continuously, or are you investing into funds that will be held for a long time?With a discretionary-style approach, even re-balancing can cause tax issues on very large sums.

Other Assets and Investments

Don’t forget other gains realised elsewhere, particularly ones that aren’t under your advice. For example, it’s not unheard of for some clients to also have their own investment account they manage directly.

Expected Growth Rates and Time

If you are arranging an investment for say 7 years with a low risk profile, the likely gains will be moderate, however if you are setting up an investment for 20 years with a high risk profile, the likely capital gains will be far higher.

Other Tax Wrappers

Whilst I won’t go into other tax wrappers in this article, a consideration of other tax wrappers, both now and in the future, is important. For example, a client may wish to use something like a General Investment Account today, but in 10 years’ time start putting the funds into a pension.

With any decisions we make, our interaction with the future ensures our pro-active planning will never be 100% accurate, however it’s important to think about all of the different factors and scenarios in a balanced way, so we can provide good tax planning advice as part of our service.

Grab the resources you need!

If you’re studying for your CII R03exam, and you’re wanting an edge onexam day, grab our free taster to try out one of Brand Financial Training’s resources for yourself. Click the link to download the R03 mock paper taster now!

Alternatively, you can download taster resources for AF4if you’re revising for that exam.

Over to You…

If you’re planning to sit a taxation or investment-related CII exam in the near future, what areas do you think will pose the greatest challenge to you?

Mark Underdown is The Nomad Paraplanner. He works remotely and can assist with investment research and financial planning reports. Visit to find out more.

Tags:calculating capital gains tax for basic rate taxpayers, capital gains tax, CGT considerations, taxation on investments

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As an expert in taxation and financial planning, I can provide valuable insights into the capital gains tax considerations discussed in the article "Capital Gains Tax Considerations on an Investment Account" by Mark Underdown.

Firstly, it's essential to acknowledge the credibility of the source, Mark Underdown, who is identified as The Nomad Paraplanner. As a professional in the field, his expertise in investment research and financial planning reports is indicative of a deep understanding of the subject matter.

Now, let's delve into the key concepts discussed in the article:

  1. Basic Rate Taxpayer and Capital Gains Tax Calculation:

    • The article outlines the process for calculating capital gains tax for basic rate taxpayers.
    • It involves determining taxable income, working out taxable gains (realized gains minus losses), deducting the tax-free allowance, and then applying basic rate tax bands (10% and 20%) to calculate the final tax payable.
  2. Taxable Income and Basic Rate Tax Bands:

    • The taxable income is calculated by subtracting personal allowances and income tax reliefs from the total income.
    • The basic rate tax band, relevant to the specific tax year (in this case, 2016/17), determines the tax rates applicable to gains within or above that band.
  3. Tax Calculation Example:

    • A practical example is provided to illustrate the calculation, with a breakdown of how different portions of the gains are taxed at different rates.
    • The example includes calculations for gains within and above the basic rate tax band.
  4. Double Up Personal Allowance and Bed & ISA Strategy:

    • Emphasis is placed on utilizing both personal allowances to make £22,200 free from capital gains.
    • The article suggests employing tax planning strategies like Bed & ISA, which involves gradually moving funds into Individual Savings Accounts (ISAs) to benefit from tax-efficient vehicles.
  5. Future Access/Encashment and Fund/Portfolio Structure:

    • Consideration is given to whether there will be gradual withdrawals or a one-off encashment in the future.
    • The structure of the investment portfolio, whether it involves continuous buying and selling (discretionary-style) or long-term holding, impacts tax implications.
  6. Other Assets and Investments:

    • The article advises not to overlook gains from other investments that may be managed directly by clients, beyond the advised investment account.
  7. Expected Growth Rates and Time:

    • Future expectations, such as the expected growth rate and investment time horizon, play a crucial role in determining potential capital gains.
  8. Other Tax Wrappers:

    • While not extensively covered in the article, it suggests considering other tax wrappers (e.g., pensions) both now and in the future when making investment decisions.

In conclusion, this comprehensive overview of capital gains tax considerations reflects the author's in-depth knowledge and practical insights into tax planning for investment accounts, providing a valuable resource for financial professionals and individuals seeking a nuanced understanding of the topic.

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