Personal taxation

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Generally, direct investments are subject to income tax on any income they generate and capital gains tax on any capital gains made on their disposal.

Cash deposits

Cash deposits with banks and building societies pay interest on the money invested. This interest paid is liable for income tax in the year it is paid, at either the starting, basic, higher or additional rates depending on the taxable income of the individual after the deduction of allowances and any available reliefs. You can see these rates in the tax tables.

In the 2023/24 tax year, individuals are entitled to a personal savings allowance giving basic rate taxpayers £1,000 of interest taxed at 0% and higher rate taxpayers £500 of interest taxed at 0%. Additional rate taxpayers do not have a personal savings allowance and all interest earned is taxed in full.

The starting rate of tax is only applicable where the savings income falls within the applicable band after the deduction of the individual’s allowances and reliefs. If the individual has non-savings income in excess of the applicable band, the starting rate does not apply and all interest paid will be liable for income tax at the basic rate and possibly, depending on the amount of income, also the higher or additional rates.

The individual investor is responsible for declaring on their tax return the interest they receive from investments in the UK or offshore, whether it is paid net or gross, and for paying the tax due at the appropriate rate.

Non-taxpayers, that is, anyone whose total income is below the annual personal allowance, can reclaim any tax which has been deducted at source or can complete a form R85 from HMRC to allow the interest to be paid gross.

If a building society demutualises and changes from a mutual organisation owned by its members to a company owned by its shareholders, it may give the members a cash bonus or free shares.

Where the investor held an account giving them membership rights, any cash payment made on demutualisation is in compensation for giving up the membership rights. This giving up of membership rights is treated as if it was a disposal of an asset and is therefore liable for capital gains tax, although in most situations the payment received will be less than the annual capital gains tax exemption and therefore no tax will be due. If the investor’s account did not give membership rights, then no asset has been disposed of and therefore there is no tax of any type due on the cash payment received.

If the building society issu...

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Corporate bonds

Within the category of corporate bonds are debentures and other loan stocks. These are loans to a company paying interest for a fixed term and returning the capital at maturity. Some bonds may also allow the company to repay the loan earlier if they so wish. Interest paid is fully liable for income tax but is paid after the deduction of basic rate tax. The bonds can be bought and sold on the Stock Exchange, so gains and losses are possible. If the bond meets the conditions for a qualifying bond, any gains are currently exempt from capital gains tax. If the bond is not qualifying and has become of negligible value or the redemption date has passed, losses are allowable against any capital gains tax liability.

Discounted securities

Some securities which are issued at a discounted price are subject to special rules. A discounted security is any security where the issue price is less than the amount payable on redemption by 15% of that amount or, if less, by 0.5% per year of that amount to the earliest redemption date. This definition means that most shares and gilts are excluded from the rules. When a sale, gift or redemption of a discounted security occurs and the amount received exceeds the amount paid, the investor is liable for income tax on the amount of the excess less any acquisition and disposal costs. Losses may be relieved against income in the year of assessment of the sale, gift or transfer. To ensure that any gain is not liable for both income and capital gains tax, the discounted security is treated as a qualifying bond and is therefore exempt from capital gains tax.

Permanent interest bearing shares (PIBS)

PIBS were fixed-interest securities issued by building societies and listed on the Stock Market. They pay a fixed rate of interest (gross) twice-yearly, which is fully liable for income tax. They do not have to be redeemed by the building society, so the original capital may never be repaid. Any profits on sales are free from liability for capital gains tax. Where PIBS have been issued and the building society subsequently demutualises, the PIBS become perpetual subordinated bonds and their tax treatment remains unchanged.

PIBS are no longer issued as they do not meet regulatory requirements; however existing PIBS can still be traded on the stock market.

Where an investor has membership rights in a building society and then receives a cash payment on demutualisation, which tax can they become liable for?

Answer : Purchase course for answer

Holders of shares are part owners of the company whose shares they hold and generally each share held carries one vote. Investing in shares offers the investor the prospect of an income through dividend payments and the possibility of a profit when the shares are sold, which may be through the Stock Exchange. The cost of buying and selling includes a commission paid to the stockbroker and the difference between the buying and selling prices (which are listed by the market makers).

Prices for shares will vary depending on the success of the company and general market conditions. Gains made on sales will be liable for capital gains tax while any losses can be offset against other capital gains in the same or following years according to the normal capital ...

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From this section you should have identified that the holding of shares either directly or through a collective investment will always have an income tax and potentially a capital gains tax implication. All taxpayers will pay income tax on their dividends which exceeds the dividend allowance at their various rates and all profits made on sales will create a potential liability for capital gains tax. For this reason, many non-taxpayers choose not to invest in shares even though the potential gains may be higher than in deposit or fixed-interest products.

What are the tax implications if an investor accepts the opportunity to receive additional shares instead of a cash dividend?

Answer : Purchase course for answer

In general terms, income from property investments is liable for income tax, capital gains are liable for capital gains tax and the purchase of property may involve the payment of stamp duty land tax (SDLT), or land and buildings transaction tax in Scotland (LBTT) or land transaction tax in Wales (LTT) which was covered in chapter 7. Property purchases and rent may also be subject to VAT, which was covered in chapter 8.

Let property

Income earned from an individual or partnership from letting property is liable for income tax in a similar way to income earned by an individual running a business, even though it is actually investment income and not earned income. This is an important differentiation, because investment income cannot be used when calculating potential pension contributions. Also, reliefs that an actual business may be able to use to reduce taxable income are not available for private property letting.

Let property - Income Tax

In calculating the tax due, income from all properties let in the UK is pooled together, regardless of the type of let or lease. Any expenses incurred can then be deducted. These include:

Repairs and maintenance (but not alterations or improvements)

Interest payable on a loan or overdraft associated with the property*

Energy saving allowance - see tax tables

Legal fees

Professional management charges

Insurance premiums

Rates and taxes paid by the landlord

Utilities paid by the landlord

Services provided by the landlord

*Tax relief for finance costs in relation to residential property, such as mortgage interest, is restricted to the basic rate. If the costs are £6,000, the basic rate tax deduction will be £6,000 x 20% = £1,200. The reduction does not apply where costs relate to furnished holiday lettings and non-residential commercial property.

Deductions can also be made for capital allowances, which c...

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Furnished holiday lettings

Furnished holiday lettings are taxed like other lettings but have certain tax advantages.

It is not necessary for the property to be in an acknowledged holiday resort or for the tenants to be on an actual holiday in order to benefit from these advantages . However, the accommodation must be:

Situated in the UK or within the EEA, furnished and let on a commercial basis

Available for commercial letting to the public for periods of at least 210 days in total

Actually let for at least 105 days

If the property is not actually let for 105 days in one year, an average can be taken over two or more properties, which may then enable all properties to qualify.

The property may be let for continuous periods of more than 31 days, but such periods must not exceed 155 days in the tax year.

Where a property satisfies these conditions, the activity of letting is treated as a trade for the purposes of loss relief. The individual doing the letting can make pension contributions on the basis of the rental income they receive and rollover relief, holdover relief and business asset disposal  relief are available against gains made on disposal.

From April 2011 losses can only be set against income from the same furnished holiday lettings business and not against income from other sources. As a result of this change in legislation, owners of such properties may now be considering turning them into long term buy-to-let investments or selling to realise the proceeds for investment elsewhere.

Woodlands

Woodlands benefit from several tax advantages, although they are generally only suitable as an investment for wealthy individuals due to the high costs involved in the purchase.

Profits generated from occupation of woodlands in the UK are exempt from income tax and gains on sales, where the woodlands are managed on a commercial basis are exempt from capital gains tax. Inheritance tax can be postponed until the trees are cut and sold, provided the woodlands have been owned for five years.

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