More and more Britains are active on the stock market. But what does this mean for the tax return? An overview presents the most important facts and shows what investors should pay attention to. Taxes are an important issue when investing in securities such as shares or funds.
More and more Britains are cheating the low interest rates on bank deposits by investing in the stock market. While such investments were long considered the privilege of wealthy people, the Internet has also opened up new opportunities in this area for small investors. But as soon as the first profit is made, the tax office makes use of it. An unpleasant surprise for investors who have not yet dealt with this topic. Since 2010, 25 percent of profits have had to be transferred to the tax authorities. However, there are some special regulations that can reduce the tax burden. Unfortunately, many prospective private investors have little knowledge of tax law. They may pay more than is necessary. High time to change this: This article provides an overview of the key facts on the subject.
Flat rate withholding tax on equity gains
The so-called capital gains tax is levied on share profits. It is a withholding tax, similar to income tax. This means that financial institutions in Britain independently pay the tax to the tax office before the profit is paid out, thus reducing the amount of bureaucracy required of the investor. The tax rate is always 25 percent, regardless of the amount of the profit. In addition, the solidarity contribution and the church tax may also be added. After all, the 2010 tax reform achieved that according to Asktraders no speculation tax is levied on shares.
Since this change, all share profits must now be taxed regardless of the holding period. Those who otherwise have a low income need not be frightened by the high tax rate. In such cases, the tax office will carry out a favourable tax assessment on request and, if necessary, apply a lower tax rate. High-earners, on the other hand, can be happy, because the tax burden is basically settled with the payment of the withholding tax. Even those who have to pay a higher rate of income tax will not be charged additionally when submitting their tax return.
Offsetting profits and losses
From time to time, when trading shares, a paper has to be sold with losses. All the better if these losses can be passed on to the tax authorities. This is the case with capital gains tax under certain conditions. Anyone who realises losses on sale because a security has lost value since purchase can offset these losses against their profits from share trading.
This leads to a reduction in the tax burden. If, on balance, a loss is incurred for the entire calendar year, it can also be carried forward to the following year. If there are losses from capital assets that do not include shares, for example from bonds or foreign exchange, these losses can be offset against any positive investment income. This applies accordingly to interest or dividends, but not to positive income such as from letting.
Exploiting tax allowances
Incidentally, up to a certain limit, profits from share transactions are completely tax-free. This so-called saver lump sum currently amounts to 801 GBP, for jointly assessed taxpayers 1602 GBP. It is to cover the incomerelated expenses for income from capital assets. In return, a deduction of the actual income-related expenses is unfortunately not possible if these are higher. If you do not want to wait until you have submitted your tax return before you see your money – or perhaps you do not need to submit a tax return at all – you can issue an exemption order to your bank. Up to the maximum amount of the saver’s lump sum, the profits are then paid out directly without tax deduction.
Advantages and disadvantages of the UK system
For small investors in particular, current tax law has the advantage in relation to capital gains that it is often not necessary to file a tax return. This saves a lot of work. Nevertheless, there is also criticism of the system. For profits in the millions are subject to the same taxation as small profits of private investors. Advertising costs such as order fees and commissions, which can be quite expensive, are also not tax-deductible.
After all: UK investors have so far been spared one tax per transaction. If investors receive dividends or shares from abroad, withholding tax is withheld there. Each country determines the withholding tax rate on investment income itself. Under the double taxation agreement between UK and the participating state, however, investors can reclaim parts of this withholding tax in order to avoid unfair double taxation.
In any case, it is advantageous to obtain comprehensive information about the individual situation before filing the tax return in order to avoid unnecessary taxes. This applies in particular to the complex area of stock gains and losses.