This week, there’s been a lot of talk about UK Capital Gains Tax (CGT) being increased. A report from the Office for Tax Simplification (OTS) – commissioned by chancellor Rishi Sunak – has recommended a major CGT overhaul. Lifting related rates could potentially raise billions of pounds in taxes and help the UK cover the enormous costs of the coronavirus pandemic.
This sounds like bad news for UK investors. However, it doesn’t have to be. With one simple move, UK investors can protect much of their investment gains from the taxman. The simple move I’m referring to? Investing within a Stocks and Shares ISA.
Stocks and Shares ISA: protection from CGT increases
A Stocks and Shares ISA is a tax-efficient savings vehicle that enables investors to generate profits from their investments, free of Capital Gains Tax. This protection makes it an extremely powerful investment vehicle. Surprisingly though, most British adults don’t own one. According to figures from HMRC, in the 2018-2019 year, less than three million people across the nation contributed to one.
Aside from their amazing tax benefits, Stocks and Shares ISAs have many other advantages. One key advantage is their flexibility. Unlike a pension (where investment gains are also free from CGT), investors can withdraw money from a Stocks and Shares ISA at any time, without penalty.
Another advantage is the very generous annual allowance. Currently, the annual allowance for a Stocks and Shares ISA is £20,000 per year per person. This means that a couple could potentially invest £40,000 per year into these ISAs tax-free. For most families, that’s more than enough allowance to save and invest for the future.
Big profits. No taxes
A third advantage – and this is the really exciting benefit – is the range of investment options within a Stocks and Shares ISA. Quite simply, these are amazing. Investors can put their money into a whole range of wealth-building assets, including funds, shares, investment trusts, ETFs and more.
For example, through a Stocks and Shares ISA, one can invest in a top global investment fund such as Fundsmith Equity. This fund has gained nearly 150% in the last five years. Any gains within an ISA would have been tax-free.
Alternatively, if an investor likes to pick stocks themselves they can buy individual shares. One option here is to invest in growth shares such as Rightmove and Boohoo, both of which have delivered stunning long-term returns to investors. Another option is to invest in dividend stocks such as Unilever and Diageo, which pay out regular income. In both cases, capital gains will be tax-free (as will dividend income).
In a Stocks and Shares ISA, it’s even possible to invest in international shares such as Amazon, Apple, and Tesla in most cases. Again, any capital gains will be tax-free. Had an investor put £10k into Amazon shares five years ago within an ISA, that money would now be worth around £50k. The capital gains tax payable on that enormous gain? Zero.
That’s the power of the Stocks and Shares ISA. For those looking to protect themselves from Capital Gains Tax, this ISA is a no-brainer, in my opinion.
Edward Sheldon owns shares in Rightmove, Boohoo, Unilever, Diageo, Apple and Amazon and has a position in Fundsmith Equity. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon, Apple, and Tesla. The Motley Fool UK has recommended boohoo group, Diageo, Rightmove, and Unilever and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.