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 (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 , 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.