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Stock Markets Explained

In the UK we not only pay tax out of our salary which is called 'income tax', we also have to pay 'council tax' on our homes and VAT (value added tax) on our shopping. As such, most of us are no stranger to taxation.

However, we're also taxed by the government on any 'capital gains' we make and the most common reason for having to pay capital gains tax is selling the shares we own on the stock exchange. Savings and investments can also be taxed, along with any foreign investments (such as property abroad that you rent out) and any savings in foreign accounts.

Capital Gains Tax

If you make some profits, or 'gains' of a certain amount, the UK Government charges you Capital Gains Tax (CGT). How much CGT you pay will depend on your income for the tax year in which you made the profit. To complicate matters further, CGT paid on profits you make from share dealing on the stock market is treated differently to profits which you make in other ways.

For share dealing, HM Revenue & Customs will take into account how many shares you sold, how much each was worth and how long you held the shares, amongst other criteria, to send you a tax bill. Shares owned through various government schemes and employee schemes have certain tax advantages, so you could be taxed less on those.

Legally you'll be required to complete a Capital Gains Tax form or declare your gains on your Self-assessment Tax Return if you are currently Self Employed. It's also worth mentioning that due to the nature of the stock markets, if you give your shares to anyone (including your children, but not your spouse) or sell them at a lower price than they are worth you will still have to pay CGT based on their original price to you.

Savings and Investments

So, as an example scenario you've cashed in some shares and paid your Capital Gains Tax. You're over the moon to have plenty of money and you want to keep half of it in a nice safe bank with a high-interest rate, the other half is buying you a condo in Spain. Any money you earn by renting out your condo will be taxed (CGT) and the money in your savings account will also be taxed unless you opt for a tax-free option such as an ISA.

You can put up to £10,200 into an ISA for the year and you won't be taxed a penny, you'll also often earn interest in excess of 6.0%. The rest of your money will likely go into a high street bank savings account which is taxed, but this occurs before the interest is added to your account so it's something of an 'invisible tax'.

There are a few other, clever ways to save on your 'savings'. National Savings and Investments (NS&I) is a Governmental finance agency backed by the UK treasury which offers a few savings solutions. For example, a Child Trust Fund (CTF) could be a good interest free savings deal for your child and you can get tax relief on pension savings.

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