How are your investments taxed? 5 important factors to be aware of

16 May 2023

If your investment portfolio makes up a large portion of your wealth, it is crucial to understand what will happen when you sell assets and crystallise their value.

As you approach retirement, or perhaps another large milestone like providing a child with a house deposit or paying for their wedding, you might be considering freeing up capital to pay for it. 

Indeed, FTAdviser reports that 1 in 5 people are selling investments to help family during the cost of living crisis. If you are planning to do so, learning how your tax bill will look after the fact is very important. 

So, if you’re unsure of how your investments will be taxed upon a sale, read on to find out five factors to understand on the subject.

1. You will generally pay Capital Gains Tax on investment profits

Usually, profits from selling non-ISA stocks and shares, properties that aren’t your main residence, and other assets worth more than £6,000 can incur a Capital Gains Tax (CGT) bill. 

Remember: you are only liable for CGT on gains, not the total value of the assets you sell.

The rate and amount of CGT you will pay depends on: 

• Your marginal rate of Income Tax 
• The value of the assets you have sold 
• The type of asset you choose to liquidate.

The below sections will explain how each of these factors may contribute to your overall CGT bill.

2. Some assets don’t normally carry a CGT liability

Fortunately, some investments won’t attract a CGT bill when you sell them.

For instance, a Stocks and Shares ISA is known as a “tax wrapper”, meaning that: 

• Any returns earned within these accounts are not subject to CGT or Income Tax
• You will usually pay no tax when you sell assets held in an ISA, providing this is done within the individual terms of that account. 

So, if you are planning to use your Stocks and Shares ISA to supplement your income, or you plan to withdraw a lump sum from it, profits earned on these investments are unlikely to incur an additional tax bill.

In addition, government gilts and bonds, as well as Premium Bonds, can usually be sold free of CGT – so if these make up a portion of your portfolio, you could benefit from a lower CGT bill upon sale.

3. The Capital Gains Tax annual exempt amount was recently reduced (and is set to decrease further in 2024)

It is important to be aware that there is an annual exempt amount under which you will pay no CGT on profits.

In 2022/23, the CGT annual exempt amount stood at £12,300 – but in 2023/24, this reduced to £6,000. What’s more, the CGT annual exempt amount is set to halve next year, leaving it at £3,000 from 6 April 2024 onwards.

So, if you are planning to sell off a range of assets in the coming years, it’s vital to take this reduced annual exempt amount into consideration. For instance, if you are liquidating assets each year to supplement your retirement income, you are likely to pay a higher CGT bill in 2023/24 than you did in 2022/23. 

4. The rate of Capital Gains Tax you pay correlates with your marginal Income Tax rate

As mentioned in section one, the rate of CGT you pay is placed in direct correlation with your marginal Income Tax rate. 

At the basic rate, CGT is paid at 10%, or 18% on residential properties that aren’t your main home. At the higher- or additional-rate, CGT is paid at 20% and 28% respectively. 

Here’s how to calculate how much CGT you might pay on gains from an asset sale.

• Calculate your taxable income. This is your total annual income, minus your Personal Allowance and any other tax reliefs you may receive, including relief on pension contributions.
• Then, calculate your total gains from investments you sell. Remember, CGT is only applied to profits, not the overall takings from a sale.
• Deduct the CGT annual exempt amount from your total gains (£6,000 as of the 2023/24 tax year). 
• Add the remaining gains to your taxable income. 
• If this total amount sits within the basic-rate Income Tax band, you will pay the basic rate of CGT. If your earnings reach the higher or additional rate, the respective CGT rate will be applied.

It could be wise to go through these motions with your financial planner. Primarily, this step can ensure your calculations are correct – and perhaps even more importantly, your planner can provide insights into how these asset sales fit into your overall financial plan.

5. Working with a financial planner can help you form a tax strategy for upcoming asset sales

Liquidating investments can be a nerve-wracking move. Not only are you crystallising their value upon sale, but you are reducing the value of your invested portfolio overall. This means it’s important to get it right – and working with a financial planner can help.

As experienced planners with years of market experience, we can assess your strategy for asset sales, advise on the tax implications of your plans, and help measure these ideas against current market performance.

Doing so could empower you to sell investments with confidence, safe in the knowledge you won’t be hit by a surprise tax bill. Then, you can focus on using the capital or income you receive to further your life goals in the coming years.

Get in touch

To discuss managing, expanding, or selling part of your investment portfolio, get in touch today.  Email info@depledgeswm.com or call 0161 8080200.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. All contents are based on our understanding of HMRC legislation, which is subject to change. 

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. 

The Financial Conduct Authority does not regulate tax advice.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested.