Free account and tax


#1

Hi there!

I’m really excited about Freetrade ever since I learned about Robinhood last year. I want to use Freetrade for ETFs and invest in a few companies, probably less than £20k in total.

I assumed an ISA was the way to go, as it is tax free up to a certain value. However, since the ISA wrapper costs to me seems quite expensive, I was looking at the free account which does not have an ISA wrapper. My assumption then is that it is necessary to calculate the tax annually and report this to HMRC using the tool below? or will an annual statement of gains be available to users?

As I understand from reading the capital gains tax allowance guidelines, everyone receives £11,700 Annual Exempt Amount. I assume this is on top of the normal income tax free allowance?

That means If I had £117k of shares and I sold them after the increase in value by 10%, then I would not have to pay any tax as the profit is £11.7k, which it the maximum allowance. That means unless my £20k portfolio increases by 59% or more, no tax is due.

Im no expert in this, so if I have missed something, let me know!


(Kenny Grant) #2

Dividends are the only other issue you need to look at - there is a separate tax on those, so if you had 100k held for a year you could possibly go over your threshold (which I think is now £2k).

As your funds grow, an ISA is a better option, and the £3/m fee becomes negligible.


(Vladislav Kozub) #3

£3 p/m becomes negligible for portfolios of circa £20k or more (considering long-term, 5+ years)


#4

£3/m is reasonable, and something I would willing pay, but where does this come from? I was under the impression from the blog below that an ISA was £10/m…

“£10 per month, or £100 per year, Alpha customers will get trading/execution, tax-wrapped accounts (eg ISAs), custody and administration of their investments all included.”


(Vladislav Kozub) #5

£10 includes free instant trades as well. Free trades are conducted at the market close price. Alpha would also potentially include SIPPs as well


#6

Ahh, just found the full pricing list :roll_eyes:

https://freetrade.io/pricing/

I only clicked the picture in the blog, which doesn’t show the full pricing list.


(Kenny Grant) #7

It’s a little confusing, but I do see why they’ve gone that route. They have two tiers:

  • Free - totally free for end of day trades, but small charge for instant trades
  • Alpha - everything free apart from a small fee for instant uk trades

Then on top of that they have other products they’re planning to offer (ISA, SIPP, Crypto?), which are rolled into the Alpha plan, but available a la carte for those on free who don’t want to spend £10 a month - hence the £3 fee, which is really reasonable.

My advice if unsure would be if savings are under 10k say, tax is not a concern (for dividends or money you are likely to make from a trade). If you’re going to go over 10k say or this is for the long term, go for the ISA when available.


(Rob Nicholson) #8

Yeah that seems sensible advice Kenny, the government may well change the dividend allowance again within a few years and so people might be glad they setup an ISA…


(Calum McWhir) #9

I see it like this: Alpha / Basic is your personal membership tier which indicates what you will pay (or not, as the case may be) for each individual service, e.g. whether or not US Instant trades are free or £1.00 respectively.

Whereas, regardless of your personal membership tier, you can still operate one or both of an ISA and GIA (and eventually a SIPP).

For example - if an Alpha member puts £20k into their ISA on the first day of the tax year, they can still open and fund a GIA as they wish, and Instant US trades are free within both accounts. The same goes with a Basic member but they would pay £3/m for the ISA account and £1.00 for any Instant trades within both accounts.

So, the only difference is what they pay for services as defined by their tier, not what underlying account types they decide to open and operate.


(Calum McWhir) #11

Hi Benori

Glad you are excited. Not much longer now!

Quite a lot to unpack in your post, but I’ll do my best to provide some high level guidance on taxation principles as they apply in the UK. Everyone’s circumstances (and therefore tax liability) differs, so seek some professional help if you are concerned about getting it right.

I assumed an ISA was the way to go, as it is tax free up to a certain value.

For the avoidance of doubt, the limitation is the amount of money you can put into your ISA(s) every tax year. This is currently £20k per year. Whatever goes in is then tax wrapped indefinitely and gains (or losses) need not be considered when you are calculating your taxes for other non-ISA investments and income in the future. That is to say, once it’s in, no more limits or values to worry about - you’ve locked in any gains as tax free for life :moneybag: (or at least until a future government has their way - but I digress).

My assumption then is that it is necessary to calculate the tax annually and report this to HMRC using the tool below?

When trading outside of an ISA (we call it a “GIA” - general investment account) the sale of shares on which you have made a gain (i.e. sale proceeds minus original purchase amount - not just the sale proceeds) is a taxable event, which basically means you need to calculate your tax liability and either pay it to HMRC immediately or total up all of your capital gains during the tax year for when tax return season comes around. Importantly though, you are only doing this when a sale of shares triggers a taxable event. If you didn’t sell any shares for five years you wouldn’t have any capital gains liability, regardless of ‘paper gains’ in the interim which are unrealised.

or will an annual statement of gains be available to users?

We are considering where tax and other detailed reports on holdings belong in terms of the roadmap. We understand there will be sophisticated users who expect this, but engineering resource is naturally focused where the maximum number of users get the maximum benefit of using the product. Any feedback on this approach, please shout!

everyone receives £11,700 Annual Exempt Amount

Correct. So for all of your taxable events that occur during a given tax year, the first £11,700 of gains can be disregarded from the tax calculation. If your net gains are under it, no CGT liability. Again, the annual allowance may change with legislation.

I assume this is on top of the normal income tax free allowance?

Not so much on top off, but more completely isolated from it. Your income personal allowance can vary for a number reasons, but this doesn’t impact your CGT allowance and everyone has one. The same goes with the tax free dividend allowance - it is a separate benefit generally unrelated to the other two.

That means If I had £117k of shares and I sold them after the increase in value by 10%, then I would not have to pay any tax as the profit is £11.7k

Precise calculations aside I get what you mean and, yes, if that was the only taxable event that you triggered during a tax year then no CGT tax would be due.

But with that said, some considerations for those of us who don’t anticipate near-term capital gains in excess of the tax free allowance:

  • Annual ISA allowances are use it or lose it. As @Rob14 has alluded to, if your circumstances change in the future, you may regret not utilising previous years. Example: maybe your house has appreciated wildly (does that still happen?) and you sell it, which is a taxable event and may use up your CGT allowance. Any further gains you realise in that tax year are taxable, and if you then needed to sell some shares whether or not they were ISA-wrapped would be important. Similarly, if in the future you find yourself regularly investing more than the ISA allowance, perhaps because your earnings have increased :necktie:, you might prefer to have ‘front-loaded’ in previous years to soften the tax blow of sales far in the future.
  • Long term investing is about building good habits, and awareness and utilisation of all possible tax benefits is a good edge to have. There will be specific examples where this may not give much percieved benefit - your specific example one of them - but I’m speaking more to the mindset in which you approach the game.
  • We can’t predict future returns - you wouldn’t want to sell because you’d reached your CGT allowance on paper if the future prospects continued to look good.

Follow up note: gains on the sale of your primary residence are exempt from CGT, so my example above would only apply to say, a buy-to-let property you had sold. The wider point I’m trying to make remains though: if you are buying and selling shares close to your CGT annual allowance, unexpected events in other areas of your life may affect whether or not any tax is due. An ISA means you have some certainty.


#12

Thanks for the in-depth response :+1:

I think ISA is the way forward for me :slightly_smiling_face:


(paul) #13

but if your CG will be less than the allowance are we still required to do some sort of self assessment and send it to HMRC?


(Vladislav Kozub) #14

Only if you sell x4 of the allowance. If you sell £46,800 and make £1 profit, still must report.


(James) #15

I’m struggling to see how a passive investor could justify starting out with Freetrade.

Let’s say you invest £1000: you’re looking at a 3.6% fee just to keep your investment wrapped in an ISA. In comparison, Cavendish Online and Vanguard charge fees below 0.4%.

You’d need over £10,000 invested for Freetrade to be competitive against the other budget providers.

Of course, once you do have £10,000s invested, Freetrade’s price model becomes much more attractive (likely the best in the industry). But, this doesn’t really help the target audience of millennials/new investors.

The fees can be avoided by leaving your investments outside of an ISA, but this exposes investors to tax obligations around the yearly allowance, recording taxable events etc. Again, this won’t be helpful for new investors who lack confidence to deal with tax implications - especially when you can open an ISA for free, in seconds, on Vanguard or Cavendish.

I have good faith in the team and technology behind Freetrade, but the current pricing model is very unattractive to new investors focused on passive ETFs.


(James) #17

That makes it somewhat easier then.

At what point roughly should people be looking to shift from a general account to an ISA account? For example, would it be reasonable to slowly build up invested funds to say £10,000 - and then just transfer that into ISA wrapper with zero tax obligations?


(Vladislav Kozub) #19

Vanguard charges 0.15% for a basic ISA account per annum, not 0.40% (this may include the ETF commissions that are additional). This means that your ISA will be more efficient with Freetrade with >£24,000. But as @Cgwinning mentioned, you do not have to report your gains (i.e. profit, not a nominal sale) of up to £11,700 per annum (£2,000 dividends income is in addition to that) OR if your total sales exceeded 4x the allowance - £46,800 - in one year.

At this point, you re able to make a decision if ISA is by any means viable in the first place. Taking your example of £1,000 into consideration, you will be absolutely fine with a basic account, you can buy the whole FAANG (Facebook, Amazon, Apple, Netflix, Google) set of shares using the partial share purchase ability (0.5 of FB, 0.15 of AMZN, etc). According to my quick research, there are 0 other brokers in the EU that would allow you to do all of that from setting an account up all the way to buying and selling all of those securities, processing your dividends, custody, service support and communication via the forum, all for £0.

This is the point where I struggle to understand the concerns bout the Freetrade’s fee structure.


(Kenny Grant) #20

The rules are complex so advisors can’t just say you’ll be fine and you’ll find most advice has to be hedged with conditions, but as a rule of thumb, if you’re just investing a few hundred or thousand, the free account will be ideal, once you save more (and you should), an ISA will become a better choice.

So I think freetrade will be an excellent choice for beginners (no fee), with a good path for medium size investors (flat fee), and then an excellent choice for long term investors (flat fee), and also give you a choice of trackers or stocks or a mix with very low trading fees compared to most.

Your plan should be:

  • Start saving something regularly into stocks today
  • If you sell, don’t lose money!
  • When you reach a few thousand consider an ISA
  • When you reach 10k move all to an ISA and continue to save
  • When you reach 1 million retire :slight_smile: