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How does tax work on gains in say Vanguard Life Strategy fund?

17 January 2022

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Question by Denise

Hi, I know you are not tax advisers but wonder if you know how tax would work on gains in say Vanguard Life Strategy fund? (ISA already maxed so not option there). Thanks


Answered by Laura Ripley

Hi Denise,

Thanks for getting in touch.

If the Vanguard fund is held in your personal name but outside of an ISA then any disposals you make in the fund will trigger a Capital Gains Tax (CGT) calculation to be carried out. This is to calculate the capital gain since you purchased the holding.

The administration service / platform or account that use to hold your Vanguard fund should be able to provide you with an 'unrealised gain' report / position to give you this capital gain figure.

This capital gain figure is crystallised when you dispose (or sell) units in the fund.

However each individual has a CGT annual exemption (currently of £12,300 per annum) to offset against net capital gains in the year, so if you haven't made any other capital gains (on any other taxable investments or property) in the year this exemption can be useful to limit tax liabilities. Any net gains in the tax year that are in excess of the £12,300 exemption are taxable. The rates are currently 10% and 20% depending on which tax band these gains fall into when looking at your personal tax position. (Please note the rates are high at 18% and 28% for capital gains made on properties).

One potential planning idea depending on your requirements and wider situation maybe to straddle the sale of the fund across two tax years. If the gain (when added to your other chargeable gains in the tax year) will be in excess of the exemption and therefore taxable, you could chose to sell part of the fund holding this tax year and sell the rest after 6th April when you will have a new CGT exemption to use. the key highlight here is that you don't have to sell your whole holding in the fund, you can choose how many units you sell and this can help you manage tax liabilities.

In fact it is a good idea to do this with all investments outside of your ISA on an annual basis; the idea being that each year you utilise the valuable annual CGT exemption and wash through gains on your investments to limit future tax liabilities.

Finally, I would just mention that even if no tax is payable on the gain you crystallise this may still need to be reported to the HMRC - for example if you normally do a Self Assessment or if the total amount sold in your investments is more than 4 times the CGT exemption.

Hopefully this helps with your query but please get in touch if need any further clarification.

Best wishes

Laura

Answered by

Laura Ripley

Chartered Financial Planner

I am a Chartered Financial Planner and Operations Director of Handford Aitkenhead & Walker, a practice that has been in business for over 40 years. I also hold the Investment Management Certificate and co-manage the investment solutions for our clients.