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6 misconceptions about general investment accounts

Date: 17 April 2024

Who is this article for?

Advisers who have clients with existing general investment accounts or prospective clients who might invest.

Key takeaways

  • With greater focus on ‘unwrapped’ investments held in general investment accounts following the Autumn Statement, we see more and more misunderstandings with how income and gains made on these investments are taxed. I have listed the top 6 questions we get on this subject:

1. If money doesn’t leave the account, there hasn’t been a disposal?

A general investment account is a service rather than a product wrapper. From a tax perspective there is no difference in holding each asset within the account or directly. Where an asset is sold for any reason, this is a disposal for Capital Gains Tax (CGT) purposes. In addition to withdrawals removing money from the account, disposals include selling units/shares to cover:

  • Platform/provider charges
  • Adviser ongoing advice fees / ad-hoc fees
  • Switching to alternative assets
  • Portfolio re-alignments / rebalances
  • Discretionary Fund Manager fees

Holding a cash balance in the account can help to avoid a disposal for each charge but at some stage the cash balance 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), it isn’t liable to Income Tax?

Within a general investment account it is common to have access to different share classes of an asset. This includes income and accumulation share classes. Where yields allow, the income share class will, at a chosen frequency, pay cash to all qualifying unit holders. The accumulation share class however will accumulate this income as capital, providing for future growth potential.

Even where cash is not paid, it is income and therefore should be disclosed in the relevant tax year it was declared. So irrespective of what happens to the income – it is paid out or not, there is a potential income tax liability.

From a CGT perspective, there is a difference, any income reinvested increases the ‘cost price’ paid for an asset. This avoids paying Income Tax and CGT on the same investment return. Whereas, where income is paid out as cash this does not impact the cost price of the units held.

3. For CGT purposes, if any gains and / or losses are made a self-assessment return is required?

Where an investor, who already submits self-assessment returns on an annual basis, makes a gain or loss on investments within a general investment account 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 any other conditions), makes a taxable gain (and therefore has CGT to pay) on an investment(s) within a general investment account, they can either register for and disclose via self-assessment or report more informally 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. Do gains get spread over the years made?

Disposals which result in a gain for CGT purposes are taxable in the year they occur. There is no aggregation across the number of years held or carry forward of unused CGT exempt amounts. 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 (known as 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. This practice used to be referred to 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.

More information on the matching rules can be found 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 general investment accounts 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 joint accountholder will have an equal share of the income and gains to apply against their own tax allowances / exemptions.

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 for 2024/25 (£3,000 each) there would be no CGT liability.

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The information provided in this article is not intended to offer advice.

It is based on Quilter's interpretation of the relevant law and is correct at the date shown. While we believe this interpretation to be correct, we cannot guarantee it. Quilter cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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