Your GIA and Capital Gains Tax
Is your money invested in the most tax efficient way? Find out how changes to Capital Gains Tax could impact your wealth if you are invested in a General Investment Account (GIA) in the new 2023/24 tax year.
What’s happened to Capital Gains Tax?
As part of last year’s Budget, Chancellor Jeremy Hunt reduced the Capital Gains Tax allowance from £12,300 to £6,000 from April 2023, with a further reduction to £3,000 from April 2024.
This means you’ll pay Capital Gains Tax on any profits over £6,000 in a tax year, for example profits in investments such as those held within a General Investment Account. A CGT liability is only realised when assets are sold for a profit, staying invested wouldn’t incur a charge, but if you are selling assets and making profits over £6,000 you could incur a charge.
What is a General Investment Account?
A General Investment Account is an account that can hold investments, with no limit on contributions or withdrawals – unlike an ISA or Pension.
Also unlike and ISA, you pay Income Tax and Capital Gains Tax on the growth in your investment account. You do this through your Self-Assessment Tax Return and the exact amount you pay will depend on your personal tax circumstances.
A GIA could be a good investment option for those who have already used up their annual ISA allowance and don’t want to tie up their money until 55 with a Personal Pension. You must keep in mind that you may get back less than you invest, the past performance of funds you are invested in isn’t a guide to future performance.
How could the change impact your investment?
With the 2023/24 tax year now underway, the decision to halve Capital Gains Tax allowance could impact your investment if you are invested in a General Investment Account. You should also keep in mind that the Capital Gains Tax allowance is across all the assets you hold, not just those held in your GIA. For example, other assets such as a property that’s not your home would be subject to Capital Gains Tax if sold at profits in excess of £6,000.
You could sell the assets held in a GIA and then investing the profits into an ISA or Pension may make sense if you haven’t used up those allowances yet, as these investments aren’t liable to Capital Gains Tax on growth generated. Selling the assets in a GIA could potentially realise a Capital Gains Tax liability so speak to a financial adviser if unsure.
In an ISA you can invest up to £20,000 in the 2023/24 tax year, and any growth will not be liable to Capital Gains Tax.
With your Pension, there is no limit on how much you can invest into it within the tax year, but there is a limit on how much tax relief you can claim each year on your contributions.
Tax relief can typically be claimed on up to 100% of your earnings or £60,000 in the 2023/24 tax year, whichever is lower. You won’t pay Capital Gains Tax on growth within your Pension. However, income taken from a Pension will be taxed at your marginal rate.
As you’ll get tax relief on eligible contributions into your Pension, this is a great way to get a boost on your money, and with growth over time in the funds you are invested in it is a popular way to build wealth over the long term.
A Pension may be even more effective for your goals now that it’s been announced that the Lifetime Allowance is set to be abolished. From April 2023 onwards there will be no Lifetime Allowance excess charge for exceeding the Lifetime Allowance, instead any excess above your allowance will be taxed as income tax at your marginal rate. The Lifetime Allowance itself will be abolished from April 2024.
The Lifetime Allowance is currently set at £1.0731 million, however it’s important to note that the entitlement to tax free cash will be frozen at the lower of 25% of your pension fund or £268,275 even when the Lifetime Allowance is abolished.
You may also be able to potentially carry forward any unused Pension allowances from the last three tax years, as long as you held a UK Pension in those years. This means that if you have extra money to invest and have already used this year’s ISA and Pension allowances, you may not necessarily have to look to a General Investment Account – you can utilise your Pension carry forward of allowances from previous years and in doing so protect your money from Capital Gains Tax liability.
With the Capital Gains Tax allowance now at £6,000 and reducing further to £3,000 a year from now in the 2024/25 tax year, the time to act is now in ensuring you are effectively using your allowances in your ISA and Pension.
Speak to a financial adviser
The best course of action for investors in General Investment Accounts, or anyone concerned with Capital Gains Tax changes, is to speak with a financial adviser.
It is always worth consulting a professional expert when dealing with tax. It is also the case that your circumstances will be unique, everyone is different, there’s no one size fits all solution to managing your investments and taxes. A financial adviser will be able to take into account your situation and advise on the best course of action.
The new tax year is a good time to have a general check in on your finances, do more with your money today, ensure you are tax efficient in your investments for the 2023/24 tax year.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Tax is subject to an individual’s personal circumstances, and tax rules can change at any time. This article is for information only and is not a personal recommendation or financial advice.
Please note a transfer from your GIA will require units to be sold, which may generate a Capital Gains Tax liability if your capital gains exceed the current allowance of £6,000.
ISA eligibility and tax rules apply. You should ensure your contribution does not result in your total ISA contributions within the tax year exceeding £20,000.
Pension eligibility and tax rules apply. You should also ensure your gross contribution does not result in your total Pension contributions within the tax year exceeding the lower of £60,000 or your earnings in this tax year.