GIAs are receiving increased attention due to tightening of taxation policies. Shaun Moore, Tax and Trust Specialist at Quilter shares the six most common tax-related questions they get asked offering some insight on each.
With the recent tightening of tax policy across consecutive budgets, General Investment Accounts (GIAs) are receiving increased attention, and so are the misunderstandings about how income and gains from them are taxed.
Below are the six most common questions we receive on this topic, along with my answers to help clarify the correct tax treatment:
1. If money doesn’t leave the account, has there been a disposal?
A GIA is a service rather than a product. From a tax perspective there is no difference in holding each asset within the GIA or directly with the fund manager.
Where an asset is sold for any reason, this is a disposal for Capital Gains Tax (CGT) purposes. In addition to withdrawals, disposals include selling units/shares to cover:
- Platform/provider charges
- Adviser & Discretionary Management fees
- Switching to alternative assets
- Portfolio re-alignments / rebalances
Holding a cash balance in the GIA can help to avoid a disposal for each charge but at some stage cash will need to be replenished. If this is done by selling units/shares this would be a disposal.
2. If an asset produces an income that is accumulated (not paid out but retained within the asset), is this still liable to Income Tax?
Within a GIA it is common to have access to income and accumulation share classes. Income share classes will, at a chosen frequency, pay cash to all qualifying unit holders.
Accumulation share classes however will accumulate this income as capital, providing for future growth potential.
Even where income is accumulated, it is still a requirement to disclose in the relevant tax year. So, there is always a potential income tax liability on income.
From a CGT perspective, income reinvested increases the ‘cost price’ paid for an asset. This avoids paying Income Tax and CGT on the same investment return.
Where income is paid out as cash, this does not impact the cost price paid.
3. For CGT purposes, if any gains and / or losses are made, is a self-assessment return required?
Where an investor, who already submits self-assessment returns on an annual basis, makes a gain or loss on investments within a GIA, they should include these within the relevant tax years’ return.
Where an investor, who does not submit self-assessment returns (because they do not meet the conditions), makes a taxable gain on an investment(s) within a GIA, they can either register for and disclose via self-assessment or report through the Real Time Capital Gains Tax Service.
Where these same investors have losses to register, they can do so in writing to HMRC directly.
4. Can CGT gains be ‘spread’ over the years made?
Gains are taxable in the year they occur, there is no aggregation across the number of years held. It is therefore important to manage gains on a regular basis to avoid them building up over numerous years only to be realised all in one go.
5. If I move between share classes is this a disposal for CGT purposes? Will the CGT matching rules apply?
Moving from one share class to another (a conversion) can be covered by s127 Taxation of Chargeable Gains Act 1992.
This allows for the movement to be treated as if there was no disposal of the old holding and no new acquisition of the new holding. The gain (or loss) is therefore ‘carried over’.
These rules are separate to share matching (identification) rules which aim to stop investors realising a gain by disposing of an asset only to buy it back again perhaps the next day (known as ‘bed and breakfasting’).
Share matching rules stop this practice by matching disposals to acquisitions firstly on the same day then within the following 30 days.
These matching rules only apply where the asset sold and re-purchased is the same share class.
For paraplanners to obtain more information on the matching rules can be found from Quilter here: Knowledge Direct – Capital Gains Tax on stocks & shares
6. If an account is held jointly, do I get two lots of tax allowances / exemptions?
Ownership of most GIAs applied for by joint applicants will be held as joint tenants. Therefore, income and gains made on the assets within the account will be allocated 50/50 to the joint accountholders.
So, each will have an equal share of the income and gains.
For example, if joint accountholders make a gain of £5,000, they are each allocated £2,500 of this gain. If they have their annual exempt amount available, currently £3,000, each there would be no CGT liability.
As more and more investors face increasing tax bills on their investment returns, the importance of understanding how income and gains are taxed is more important than ever.
Hopefully, this article has clarified some regularly misunderstood areas.
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