Investing fundamentals #6 – Consider taxation

In the latest in a series of blogs about the ten fundamentals of investing, I talk about why it is so important for investors to think about taxation.

Taxation is an important consideration with investments, as you are likely to pay income tax and capital gains tax when your investments do well.

Whilst you should consider tax and aim to keep taxes to a minimum where possible, it is important not to allow the tax tail to wag the investment dog. For this reason you should not allow tax considerations to determine your investment strategy.

Using an Individual Savings Account (ISA) is a valuable way to reduce the amount of tax you pay on your investment returns.

Different investment assets are treated differently within an ISA, so a focus on fixed income and property assets in your ISA can result in the greatest tax efficiencies. This is because the dividends (income payments) from UK equities are already subject to a 10% tax credit which cannot be reclaimed within an ISA.

Outside of an ISA, investors can make use of their annual capital gains tax (CGT) allowance which results in no capital gains tax to pay on realised gains up to the threshold each tax year.

Any unused allowance from the previous tax year can also be carried forward to the next tax year, making investments which produce capital gains rather than income very tax efficient for many investors who already receive taxable income.

Read about all ten investing fundamentals by downloading our free guide:

The Investing Fundamentals Guide 2014