As a general rule, the UK investment market is one of the best and most advanced in the Western world. This is aided by a number of open but clearly defined market regulations, which enables investors to trade relatively freely within a secure and transparent entity.
There’s also a growing number of products housed within this marketplace, each of which has its own unique benefits and potential disadvantages. These products also have variable taxation rules and requirements, which will impact on the profitability of your individual endeavours.
In this post, we’ll review some of the most popular investment products available in the UK while asking what taxes they incur?
- Forex and Derivative Products
The forex market is one of the biggest financial entities in the world, with an estimated $5.3 trillion traded every single day by investors.
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Currency is also considered to be a derivative financial product, as it can be traded freely without requiring investors to assume ownership of the underlying asset. Forex trading is also margin-based, meaning that it’s possible to lose or earn more than your original investment.
This type of product is subject to capital gains tax, which is applied when directly held assets are disposed of. The disposal of assets covers a number of different circumstances, while it even extends to the any compensation payments received for a particular asset.
The applicable rate for capital gains tax is calculated in line with income tax bands, minus any annual exemption amount or incurred losses. From the next financial year (2018/19), gains within the basic rate band (up to £34,500) will pay 10% in capital gains tax, with this rising to 20% on earnings higher than £34,500.
- Standard Pensions
There’s a big focus on UK pensions at present, with the retirement age rising as the value of the weekly state pension diminishes.
Further controversy also surrounds the taxation of standard pension plans, with much of the gathered income having already been taxed by the authorities.
In simple terms, 25% of your fund is tax free when you withdraw cash from your account. You’ll then pay income tax on the other 75%, although it’s interesting to note that your free dividend does not count towards your annual personal allowance.
The standard personal allowance is currently £11,850 per individual, with the total taxation payable dependent of your total income and your existing tax rate.
- Real Estate
We referenced capital gains tax earlier, and property investors who sell real estate on will need to pay a levy based on the value of the house.
There’s also a number of taxes associated with buying a property in the first place, with Stamp Duty being one of the most common. This applies to all residential properties that cost more than £125,000, or non-residential properties that cost more than £150,000.
The rate will increase in line with the value of the asset in question, while investors will be required to pay an additional 3% levy when they purchase an additional home or buy-to-let property.
Interestingly, so-called house flippers may be able to avoid stamp duty entirely by investing in property that costs less than £125,000.
Just remember you’ll also need to factor in repair and refurbishment costs with this type of investment, as this will add value and hopefully increase your eventual profit margin (whether you buy or lease).
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