Home Money My investment fund has grown to £46,100 in eight years. Have I fallen into a capital gains tax trap?

My investment fund has grown to £46,100 in eight years. Have I fallen into a capital gains tax trap?

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Tax trap: the monthly investment is worth it, but has our reader entered a CGT trap?

I have been making regular monthly investment contributions and reinvesting the dividend.

I have paid out £300 each month for the last 97 months and in doing so have accumulated £46,100 out of a total investment of £29,100 plus any dividends I have reinvested.

How can I calculate capital gains tax on this investment and have I walked into a tax trap?

What options are available to me to reduce my future capital gains tax bill? RB by email

Tax trap: the monthly investment is worth it, but has our reader entered a CGT trap?

Tax trap: the monthly investment is worth it, but has our reader entered a CGT trap?

Harvey Dorset from This Is Money responds: Committing to a long-term investment and meeting those monthly contributions is no easy task.

In your case, the reward has been that your investment has grown steadily and considerably beyond what you yourself have invested.

What this means, however, is that you will likely face a hefty capital gains bill when you sell these investments.

Still, there are ways to reduce your eventual tax bill when you want to unload your investments in the future.

Up to a certain level, you won’t pay taxes on any profits you make. This comes in the form of the annual allowance, which last week was reduced from £6,000 to £3,000 for the new financial year.

On top of this, you are entitled to a £500 dividend allocation for the new year starting in April.

Going forward, there are also a variety of ways you can reduce your capital gains tax burden or make the most effective use of your monthly investment contributions.

These options include making a gift to your spouse, capitalizing on Isas benefits and gradually drawing down your investments using your annual allowance.

I asked two experts for advice on what you can do to reduce your capital gains bill and get the most out of your investments in the future.

Reduce Harm: Toby Tallon Suggests Giving a 'No Gain, No Loss' Gift to Your Spouse

Reduce Harm: Toby Tallon Suggests Giving a 'No Gain, No Loss' Gift to Your Spouse

Reduce Harm: Toby Tallon Suggests Giving a ‘No Gain, No Loss’ Gift to Your Spouse

Toby Tallon, Tax Partner at Evelyn Partners, responds: Congratulations on setting aside a regular sum for so long.

I can empathize with the tax headache, having been in a (much more modest) position collecting over 10 years of accumulation fund units.

Fortunately, you have many tools to jump the tax trap.

I will consider your tax situation in my response, but not any investment considerations.

Calculating the profit

The base cost of your investment is the total of:

· Monthly contributions. He has already calculated them as £29,100 (£300 for 97 months); and

· Dividends reinvested. Check 8 years of statements (an easier approach if you have access to them) or use a spreadsheet to add the appropriate accrual shares of each dividend (which takes more time).

All shares of the same asset are grouped together for cost basis purposes, assuming no shares of the same asset are repurchased within 30 days of the sale.

The proceeds from a sale are equal to the total cost basis in proportion to the number of shares sold. For example, if you owned 500 shares and sold 100, the cost basis of these 100 shares would be 100/500 of the total cost basis.

reducing pain

1) Annual exemption

· The annual Capital Gains Tax (CGT) exemption was £6,000 for 2023/24, reducing to £3,000 for 2024/25.

· This is a ‘lose it or use it’ exemption that could be used for multiple tax years.

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2) Capital losses

· Any capital losses realized on other assets can be compared to capital gains realized in the same tax year or carried forward to future tax years.

· Any other investment with losses could be offset by the profit.

3) Gift to spouse

· If you are married or have a civil partnership, consider gifting shares to your spouse so they can use their annual exemption or capital losses.

· Shares donated to a spouse/civil partner are ‘no gain no loss’, meaning there is no capital gain for the transferor and the transferee spouse bears the base cost.

4) CGT rate

· CGT is 10 per cent on any profits that meet the remaining threshold of the basic income tax rate.

· CGT increases to 20 per cent once you are a higher rate taxpayer.

5) EIS/SEIS Investments

· Investments in certain companies that qualify for EIS/SEIS carry potential capital gains tax deferrals/exemptions (among other tax benefits).

· These investments carry significant investment risk and specialist advice is recommended.

More pain?

There may be another tax issue to consider. Although dividends were automatically reinvested, they are still considered income.

However, the dividends will hopefully be covered by your annual allocations:

· Personal authorization. Offset first by profits and other income from savings, anything remaining could be offset by dividend income. Worth £11,000 in 2016/17, rising to £12,570 in 2021/22.

· Provision of dividends. Targeted dividend allocation of £5,000 in 2016/17 and 2017/18, £2,000 from 2018/19 to 2022/23, £1,000 in 2023/24 and £500 in 2024/25.

Any dividends in excess of the above deductions should have been taxed at rates of up to 39.35 percent, depending on your overall income and the tax year.

Never more

There are a few points you may want to consider next time.

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· Investing through Isas avoids complexity and tax costs. I assume these shares are not in an Isa.

· All interest, dividends and capital gains arising within an Isa are tax-free.


· Contributing to a pension would allow all income and capital gains to accumulate tax-free within the pension envelope.

· Taxes may be applied to withdrawals after a person has reached retirement age (currently age 55, which will increase to age 57 starting in 2028).

· Pension rules are complex and specialist advice is recommended.

Liviu Ratoi, independent financial advisor at Flying Colors responds: To calculate your capital gains tax, you will first need to determine the total profit earned by taking the current value and subtracting the original investment.

1712728009 604 My investment fund has grown to 46100 in eight years

1712728009 604 My investment fund has grown to 46100 in eight years

In this case the calculation is: £46,100 (current value) minus £29,100 (the “accounting” cost of £300 per month for 97 months), which equals £17,000.

Since you have reinvested the dividends received during the period, you will need to account for them in your overall profit.

When dividends are reinvested, they increase the original accounting cost, which therefore reduces your profit when you eventually sell the investment.

To determine the revised accounting cost after reinvesting the dividends, you will need to track each reinvestment and add it to the original accounting cost of £29,100.

Once you have calculated the total profit, you can calculate the CGT. Currently, CGT applies to different rates depending on your total income and profits throughout the tax year. For fiscal year 2023/2024, the rates are as follows:

· Basic rate taxpayers: 10 per cent on profits on tax-free allowance up to the basic rate income tax band (£50,270 for the 2023/2024 tax year).

· Taxpayers with Higher Rate and Additional Rate: 20 percent on profits on the tax-free franchise.

As a UK resident, you will also have an annual tax-free allowance, known as the “Annual Exempt Amount” for capital gains.

For the 2023/24 financial year, this is £6,000 or £12,000 for jointly held investments, reducing to £3,000 and £6,000 respectively for the 2024/25 financial year.

Whether you have walked into a tax trap depends on your individual circumstances.

If the total profit does not exceed your annual tax-free allowance, then you have nothing to worry about.

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However, if your total earnings exceed your annual allowance, you will need to pay taxes on the portion above the allowance at your marginal tax rate.

If your annual income is close to £50,270 and the gain exceeds your annual allowance, then it is likely that some of the gain will end up being taxed at 10 per cent (basic rate) and some at 20 per cent (higher rate).

This is because capital gains are added to your income during the tax year to determine your overall position and therefore what tax rate applies.

In terms of reducing your future capital gains tax bill, you may want to consider some of the following options:

1. Use tax efficient products: Consider investing through Isas or Pensions where the gains are tax-free or tax-deferred.

2. Make use of your annual tax-free allowance: Each year, you have a tax-free capital gains allowance. Make sure you use this efficiently by spreading your profits over multiple tax years wherever possible.

3. Compensation of capital losses: If you have capital losses from other investments, you can offset them against your gains, reducing your overall tax liability. It is important to note that these losses must be registered with HMRC within 4 years of arising and can be carried forward indefinitely.

4. Donation goods: Consider donating assets to your spouse or family members who may be in a lower tax bracket and have them cash out the assets, effectively reducing tax liability.

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