7 - Taxation

• Taxation Aspects

  • Know which taxes apply to specific investments: income; capital gains; inheritance; transaction
• The UK Tax Year
• In most countries, the government’s financial year (also known as the tax year) is the same as the calendar year. The UK's financial year runs from 6 April until 5 April the following year. Tax rates and reliefs for the following tax year are decided by Parliament in the annual Finance Act following the presentation of the Budget to Parliament each year. UK residents are required to pay relevant taxes on their income and other gains realised during the tax year, subject to any applicable allowances and exemptions.
• UK Income Tax

  • Income tax may arise on earnings from employment, self-employment, pension income, interest on savings, dividend income, rental income, and income paid from trusts. Each resident is given a personal allowance on which no income tax is payable, and will pay income tax on additional income earned above that level. Certain types of income are not taxable.
• Income Tax Rates and Allowances

  • Income tax is applied at tiered rates, with different bands and rates for taxable income above the Personal Allowance. The tax bands and rates for the 2023–24 tax year are shown. The personal allowance is reduced for those earning over £100,000.
• Income tax calculation


  Includes various considerations beyond the remit of this workbook. Income tax is applied at tiered rates, with a personal allowance and tax rates based on income levels.
• Income tax collection

  Employment income tax is deducted at source by the taxpayer's employer under the Pay As You Earn (PAYE) scheme. All other forms of income need to be declared on an annual tax return, due by the end of January following the tax year end. Tax must be paid by 31 January in the following year, with interest charged on late payments.
• Savings Income

  • Interest earned on savings is subject to income tax. Each person gains a personal savings allowance for savings income. Savings income up to this allowance is not subject to tax, but any income above the allowance is taxable at the prevailing rate.
• Dividend Income Allowance


  • Each person must pay tax due on any dividend income earned, including any dividend distributions paid by collective inv
• If a saver owes any tax on their savings income, the savings institution will pay the income to the saver without deducting any tax amount
• If the saver owes any tax, they must pay the relevant sum through their HMRC self-assessment
• For the 2023–24 tax year, the dividend allowance is £1,000
• Tax bands for dividend income

  • Basic rate: 8.75%
  • Higher rate: 33.75%
  • Additional rate: 39.35%
• A higher-rate taxpayer pays 20% on the first £37,700 of their taxable income and 40% on the rest of their taxable income
• No tax is payable on savings income below the £500 allowance applicable to a higher-rate taxpayer
• A higher-rate taxpayer pays 33.75% on dividend income above the dividend allowance
• Capital gains tax (CGT) is payable on profits generated on the sale of most assets, including equities and CISs
• CGT does not apply to gains made within an individual savings account (ISA) or pension wrapper
• Private investors in the UK are exempt from paying CGT on profits generated from the sale of gilts and qualifying corporate bonds
• The capital gain on an equities transaction is calculated as the difference between the sale price and the purchase price of the shares
• Individuals may carry forward losses from investment transactions to be offset against gains in future fiscal years
• HMRC has matching rules to identify which acquisitions should be allocated to a sale in CGT calculations
• Capital Gains Tax (CGT) calculation process

  1. Acquisitions on the same day as the sale

  2. Acquisitions during the 30 days following the sale on a first-in, first-out basis

  3. Shares bought at any other time are pooled together to form a Section 104 holding
• Section 104 holding


  Shares acquired prior to the day of the sale, of the same share class in the same company, are pooled together
• Calculation of the cost of a share in a Section 104 holding

  Divide the total amount paid for shares in the Section 104 holding by the number of shares
• Shares held on 31 March 1982 are valued at the price on that day and not at the original cost
• Every individual has an annual exempt amount before they start to pay CGT. For 2023–24, this is £6,000 for individuals, personal representatives and trustees for people with disabilities, and £3,000 for other trustees
• CGT Rates and Reliefs

  • 10% for basic rate taxpayers or 18% on residential property
  • For higher and additional rate taxpayers, the rate is 28% on residential gains and 20% for gains from other chargeable assets
  • Trustees and the personal representatives of someone who has died are also subject to the 28% rate for residential property and 20% for other chargeable assets
  • 10% for gains qualifying for business asset disposal relief (BADR)
• Entrepreneurs’ relief allows individuals and some trustees to claim relief on qualifying gains made on the disposal of all or part of their business, provided the person was a sole trader or partner, and had owned the business for at least two years prior to the sale
• Inheritance tax (IHT) is usually paid on an estate when somebody dies. It is also sometimes payable on trusts or gifts made during someone’s lifetime. There is a minimum threshold of £325,000 – so no inheritance tax is payable on an estate worth less than this value. In addition, if a family home is being passed on to children or grandchildren, this threshold can increase to £500,000. Where the value of the estate exceeds the threshold, IHT is payable at 40% on the excess
• Married couples and registered civil partners can effectively double the threshold on their estate when the second partner dies. If the estate was passed to the surviving spouse, the unused IHT threshold or ‘nil rate band’ can be applied upon the death of the second spouse or civil partner when they die
• Reliefs for Inheritance Tax (IHT)

  • Spouse or civil partner exemption
  • Charity exemption
  • Potentially exempt transfers
• Exemptions from inheritance tax

  • Spouse exemption
  • Charity exemption
  • Potentially exempt transfers
  • Annual exemption
  • Small gift exemption
  • Wedding and civil partnership gifts
• Spouse exemption allows gifts to a spouse without penalty
• Charity exemption exempts gifts made to a 'qualifying' charity from inheritance tax
• Potentially exempt transfers are generally exempt from inheritance tax if the benefactor survives for seven years after making a gift
• Annual exemption allows individuals to give up to £3,000 away each year, with the option to use any unused allowance from the previous year
• Small gift exemption permits individuals to make tax-free gifts of up to £250 per person
• Wedding and civil partnership gifts are exempt up to £1,000 per person, separate from the annual exemption allowance
• Transaction taxes are triggered by trading in specified assets such as shares or the sale of a property