Capital Gains

Capital gains made on sale or redemption of government stock are not, of course, liable to income tax. As far as capital gains tax is concerned they are given special treatment. If a stock is disposed of at a profit within a year of its acquisition, there is a liability to CGT on the gain. But since the first £30,000 of gain in any tax year is exempt anyway, this will not concern most small investors. Profit made on government stock held for over one year is exempt from any CGT liability.

The impact of income tax and CGT was ignored on page 57 when calculating redemption yields, as only gross yields were being discussed. In calculating net after-tax yields allowance must be made for the distinction made in tax liability between income and profit.

Example

£2,000 of 8% stock is bought at 82 by a person liable to basic-rate income tax but not to investment income surcharge, and is sold nine months later at 84, after receipt of two half-yearly interest payments. Calculate the net total after-tax return on the investment expressed as an annual percentage rate on the outlay, ignoring dealing costs.

Answer

Income received (gross) £160

less Tax 48 net £112

Capital gain, 20 x 2 (assume no CGT) 40

Total net £152

Capital invested was £1,640 for three-quarters of a year. Therefore net return:

152 x 4 x 100

3 x 1640 = 12.4% net return per annum.


Tax Treatment

The interest earned on gilt-edged stocks is, of course, taxable income in the hands of the stockholder. In practice the interest payments are made by the Bank of England, the registrar for most stocks, net of tax at the basic rate of income tax, so the stockholder, unless he is liable to higher rates of income tax or to the investment income surcharge, is not liable to pay any further tax on it. Thus a holder of £1,500 nominal of 81/a % stock will receive each half-year an interest warrant for £44.60 net, representing a gross payment of £63.75 (4.25% of £1,500) less tax at 30%.

A very small... see: Tax Treatment


Personal And Business Finance 2018

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