1. Certificate for Introduction to Securities & Investment (Cert.ISI) Unit 1 Lesson 41:  Direct and indirect taxes as they apply to individuals:  Income tax  Capital gains tax 41cis

2. Tax The main taxes that affect private investors are:  Inheritance tax  Income tax  Capital gains tax  Stamp duty

3. Income tax Private investors have to pay tax on income from their savings and their investments. Taxable income includes:  Interest on bank deposits  Dividends payable on shares  Income distributions paid by unit trusts  Interest in government stocks and corporate bonds Income from savings and investments are added to the investor’s other income, such as salary or pension  Income tax is then charged on the total amount  Individuals have annual personal tax allowances on which no tax is due  The remaining income is grouped into bands and taxed at different rate

4. Income tax levied at source Tax on investment income is often levied at source at the basic rate for that type of income  Dividends payable on shares  Dividend distributions by unit trusts invested in equities  Interest on cash deposits  Interest paid by bonds (coupons)  Interest distributions by unit trusts invested in bonds Dividend income in relation to the basic rate or higher rate tax bands Tax rate applied after deduction of Personal Allowance Dividend income at or below the £37,400 basic rate tax limit 10% Dividend income at or below the £150,000 higher rate tax limit 32.5% Dividend income above the higher rate tax limit 42.5% Rate2010-11 Starting rate for savings: 10%*£0-£2,440 Basic rate: 20%£0-£37,400 Higher rate: 40%£37,401-£150,000 Additional rate: 50%Over £150,000  Basic rate for dividends is 10%, so 10% deducted at source  Basic rate for interests is 20%, so 20% deducted at source  Dividends in the UK are always paid net of tax  Interest income can be paid gross or net

5. Income tax on dividends Dividends are paid by companies out of income from which Corporation Tax has already been deducted. Is it fair that shareholders should pay income tax on the dividend as well? Dividend income in relation to the basic rate or higher rate tax bands Tax rate applied after deduction of Personal Allowance Dividend income at or below the £37,400 basic rate tax limit 10% Dividend income at or below the £150,000 higher rate tax limit 32.5% Dividend income above the higher rate tax limit 42.5%  In recognition of this, the UK government taxes dividends at 10% for basic-rate tax-payers  The dividend is paid net of the 10% tax rate  The shareholder also receives a tax credit voucher for the 10% tax paid on the gross dividend income Net dividend paid to shareholder (i.e. 90% of the dividend income) Tax credit (10% of the dividend income) Gross dividend income (dividend paid plus tax credit) £63£7£70 £54£6£60 £90£10£100  If you are a basic-rate tax-payer (i.e, total income below £37,400) there is no further tax liability for the dividend income  If you are a higher-rate tax-payer (i.e, total income above £37,400) you will be taxed on the gross dividend income at 32.5% or 42.5%, but you will get credit for the 10% you have already paid  Note that the tax liability is on the gross amount of the dividend

6. Income tax on interest Tax on interest can be paid gross (no tax levied at source) or net (tax deducted at 20%)  The 10% starting rate is for savings income (i.e. interest) only Rate2010-11 Starting rate for savings: 10%*£0-£2,440 Basic rate: 20%£0-£37,400 Higher rate: 40%£37,401-£150,000 Additional rate: 50%Over £150,000  However if non-savings income is above this limit then the 10% starting rate will not apply  The 10% starting rate is only of much use to people who have no source of income other than interest on their savings  If your level of income means that you don't need to pay tax, you can complete a form 'R85 - Getting your interest without tax taken off‘ and apply to have your interest paid gross  If you are a higher-rate tax-payer, you will have to pay additional tax on your interest Nearly all interest on savings and bonds in the UK is paid net of tax at the basic rate of 20%

7. UK income tax – the big picture

8. Capital gains tax Capital Gains Tax (CGT) is tax levied on an increase in the capital value of an asset (usually when that gain has been realised upon disposal). This includes when you..  Sell or give away and asset  Transfer of dispose of all or part of an asset  Receive a capital sum, such as an insurance pay- out for a damaged assets Most types of assets are liable to CGT  Shares  Units in unit trusts  Certain types of bonds  Property UK individuals have an annual tax-free allowance – the annual exempt amount  In tax year 2009/10, the annual exempt amount is £10,100  Any net gains in excess of £10,100 are taxed at a rate of 18%

9. Capital gains tax – key exemptions Some assets are exempt from CGT. These include...  Your main home  The definition of main home is “principal private residence” Updown Court, Surrey  Assets held in tax-exempt accounts  ISAs, Child Trust Fund or Approved Pension  Transfers between spouses  Gilts and certain other sterling bonds  Qualifying corporate bonds

10. Inheritance tax Inheritance tax (IHT) is tax usually levied on the assets (i.e. the “estate”) bequeathed by a deceased person  However, it can also be levied on trusts or gifts made during a person’s lifetime IHT is based on the value of assets that are transferred during the individual’s lifetime or that are remaining at death  Each individual is entitled to a nil-rate IHT rate band currently set at £325,00  Transfers in excess of the nil-rate band are taxed at the rate of 40% Major exemptions from IHT  Assets left to registered charities  Gifts made more than seven years before death (if certain conditions are met)  Assets left to the deceased person’s spouse  Unused allowances from a late spouse or civil partner can be transferred to a second spouse or civil partner

11. Stamp duty and Stamp Duty Reserve Tax (SDRT) Stamp Duty is a tax paid on share trades where a stock transfer form is used. SDRT is payable when the shares are bought electronically  Stamp Duty or SDRT is paid only by the purchaser  The rate is 0.5% of the purchase price Major exemptions from Stamp Duty and SDRT  Foreign shares  Bonds  OEICs  Unit trusts  However, for Unit Trusts and OEIC, the fund will pay duty when it buys shares and the cost may be passed on to the investor in the difference between the buying and selling price (the “spread”  Exchange-traded Funds (ETFs)

12. Value-Added Tax Value-Added Tax (VAT) is chargeable by firms and individuals whose turnover exceeds a certain amount then they supply goods and services known as taxable goods and services VAT is relevant to a number of investment services:  Investment management fees charged to clients, such a private individuals, would be VATable  However, fees charged for investment management services to an authorised unit trust (AUT) are exempt  Also, brokers’ commission for the execution of a stock-market trade are also exempt.