Tax

Tax on investments

Tax on investment accounts has changed.

Knowing which investment accounts benefit from tax relief and what allowances might be available to you can mean the difference between tens of thousands of pounds of tax.

At Montgomery Associates, we have always placed an ongoing emphasis on tax efficiency. As a result of taking up clients’ tax-free ISA and pension allowances each year, today nearly three quarters of all the money we invest is in tax-efficient accounts.

As an investment manager, to ensure a portfolio remains adequately diversified and in line with a target risk profile, realising capital gains at some point is likely to become unavoidable. This could be the case whether the gains are reinvested or distributed as income.

On this page we address the following:

  • Capital Gains Tax on investment portfolios

  • Income Tax on dividends and interest

Client Survey

Clients are invited to complete a few short questions below - scroll down to find the Survey. With the answers we can then contact you to discuss any queries and introduce you to an accountant if needed.

[Page last reviewed 11th April 2024]

Capital Gains Tax

In the Autumn Statement 2022 it was announced that Capital Gains Tax (CGT) - the tax you pay on the disposal of an asset that has increased in value - was changing. Two years on and the £12,300 CGT-free allowance (the annual exempt amount on which no tax is paid on gains) we had become used to was cut in half to £6,000 and, on 6th April 2024, it halved again to £3,000.

Gains on investments from now on will enjoy less and less in the way of tax-free allowances. As an investor, the likelihood is that investment accounts other than ISAs and pensions will be subject to tax on profits which might otherwise have fallen within a tax-free allowance in the past.

Read on to learn how it could impact you.

  • 5th April 2024 marked the end of the 2023/24 tax year and the end of the period for the £6,000 CGT allowance, down from £12,300 in 2022/23. This reduction means that your tax certificate to be issued in summer 2024 may show a chargeable gain on which tax is owed. Any tax owed will need to be settled before the end of January 2025 via your self-assessment tax return. From 6th April 2024, the allowance has halved again to £3,000.

  • If the gains in your General Investment Account (GIA) exceed the £6,000 allowance during the current tax year, then anything in excess of this is subject to 10% CGT (Basic rate) or 20% CGT (Higher/Additional rate).

    For example, if your are a higher rate tax payer and gains within your GIA amount to £10,000 then you will have exceeded the allowance by £4,000 so you will owe £800 of CGT.

  • No. One of the biggest advantages of an Individual Savings Account (ISA) is that anything within it is permitted to grow free of capital gains tax and any dividends are also free of income tax. If you have a Cash ISA, the interest you earn within it is tax free. If you have a Stocks & Shares ISA, the profits you might make on shares or funds you buy and sell within it are tax free. Dividends paid within an ISA are also tax-free. Buying and selling investments within an ISA are therefore extremely tax-efficient.

    You can save anything up to £20,000 into an ISA each tax year and, if you have made a withdrawal from your ISA, under new rules introduced in 2016 you should be able to return this to your account within the same tax year without losing your allowance.

  • With the CGT allowance reducing year-on-year, if you hold investments outside of an ISA or pension then there is an increasing chance your account will be subject to some degree of Capital Gains Tax either this year or next.

    You may be able to offset gains with losses, either by securing additional investment sales during the tax year or by carrying forward losses from previous tax years. You should check the position with your accountant and be sure to register any historical losses with HMRC so these can be utilised in future tax years to offset any gains.

  • Not necessarily, however you may now need to submit a tax return and declare a CGT liability either yourself or with the help of an accountant now the CGT allowance has reduced. If you would like an introduction to an accountant please contact us.

  • Any unrealised gains that have accumulated during your lifetime are reset at the date of death and are therefore free of Capital Gains Tax.

How are my investment accounts affected by tax?

* Withdrawals themselves do not trigger a tax liability, but dividends and/or selling investments may do.

How has the CGT allowance changed over the years?

Short survey

If you are concerned about Capital Gains Tax and the implications of the reduction in CGT allowance, please complete this form and we will be in touch.

Dividends

With tax-free allowances under pressure, you might not be surprised to learn that the Dividend allowance has reduced in recent years too. The current tax-free Dividend allowance stands at £500 (2024/25 tax year) - down from £1,000 (2023/24 tax year), £2,000 (2022/23) and down from as much as £5,000 in 2017/18.

The tax applicable to Dividends over this allowance is subject to 8.75% (Basic rate), 33.75% (Higher rate) and 39.35% (Additional rate).

Interest on Savings

Since the rise of interest rates in 2022 savers have started to attract more meaningful returns on their cash savings. However for the first time in years this interest on cash savings may need to be declared via self assessment.

If your income is within the Personal Allowance of £12,570 then you can receive interest of up to £5,000 and pay no tax on it - this is called the ‘starting rate’. If your income exceeds the Personal Allowance then this tax free interest allowance quickly erodes until income exceeding £17,570 attracts no tax-free starting rate allowance at all.

In addition to this, you may also receive a £1,000 Personal Savings Allowance if you are a Basic rate tax payer, or £500 Allowance if you are a Higher Rate tax payer.

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Montgomery Associates are not tax advisers and you should seek professional advice from an accountant for tax matters relating to your personal circumstances.

Information and examples on this page are correct as at the time of publishing and may be subject to change.