Investments


Investments are considered to be different to savings for two main reasons. Firstly, they tend to be much longer term in nature – often five years or more. Secondly, they tend to have an element of risk attached – there is the potential that you could lose money as well as gain it.

There are dozens of different types of investment products available – all with different goals, risks, potential benefits and timescales attached. Some are more high risk such as stocks and shares. These could potentially give you a greater return on your investment, but could also mean that you may lose more. It all depends on how well the markets that the stocks are shares are invested in perform. Lower risk investments may not offer you such a good return on your investment but are also much less likely to lose you money. Examples of this may be bonds which work a little like an IOU – you lend a company money for a set period of time, and they promise to pay you back your money at the end of a period of time with a certain amount of interest.

We don't offer investment products, but as lots of other financial products are linked to investment it's an area that's important to understand. To help you understand more about investing and the different options available, we've compiled a wealth of information that tells you more.

What sort of investments are there? 

Investors can choose to buy investments directly or indirectly. When you directly buy an investment you own the underlying asset, such as a share or bond. Indirect investment is where you buy the underlying asset through a ‘tax wrapper’ like an individual savings account (ISA) or pension. We recommend that you speak to a professional adviser first before you make any investment – particularly those that carry an element of risk.

Direct Investments

Cash

There are a range of savings accounts available. Generally you achieve a higher rate of interest the longer you commit to not accessing your money.

Fixed interest securities

This asset class includes corporate and government bonds.

A bond is like an IOU. When you buy a bond you are effectively loaning your money to an institution for a period of time.

Providing the institution doesn’t default the loan is repaid at the end of the term. You will also receive interest from the bond. Interest you receive from the bond is called a coupon and is often paid semi-annually.

Property

Property investment can include a buy-to-let flat, or a commercial property like a shop or factory. Property is one of the most 'illiquid' forms of investment as it can take some time to buy and sell. So if the markets move quickly, it can be more difficult to adjust your exposure when compared to against other asset types. 

Shares

When you purchase an individual share you are becoming a part owner (shareholder) of that company. As the company grows in value your share is worth more. However there is a risk that the value of shares can go down as well as up. Additionally, some companies distribute some of their profits each year called a dividend.  

Commodities

Investing into a commodity is owning raw materials that are either consumed or used to build other products. There are several ways to purchase a commodity, the most common method of direct ownership is purchasing raw materials such as precious metal bullion, for example gold.

Assessing investment performance

How do you know if an investment is performing for you? 

Where to start?

Before you make any type of investment, it's important to consider what your savings and investment goals are – that way you'll have something to benchmark against. For instance, you might be:

  • Saving a specific amount of money to make a significant purchase.
  • Investing to repay a loan or mortgage.
  • Looking to generate the maximum return possible in the shortest possible time.
  • Looking to build a nest egg for the future.

Then you need to look at the amount your investment has provided as a ‘return’ to help you achieve those goals. To do this, you’ll need to look at:

  • What you originally invested.
  • How much have you subsequently put into your investment by way of additional contributions.
  • What you have received from your investment by way of an income, dividends, bonuses, interest or rent.
  • The investment’s time period.
  • The rate of inflation over the period of investment.

How do you make the calculation?

The Money Advice Service has a detailed explanation of what you need to calculate, but in essence it suggests you need to find out what the rate of inflation has been during the time you have made your investment. Then using the information you have gathered, calculate the 'real' return on your investment. This is the return you would have got, over and above the rate of inflation for that period. Find out more on the Money Advice Service website.

What is Capital Gains Tax?

Essentially capital gains are profits you make on 'assets' you've sold. Assets can be all kinds of things - from houses and  jewellery to stocks and shares. HMRC looks to tax you on the 'gain' you make when you sell these assets as Capital Gains Tax.

Two things are important to note about Capital Gains Tax. Firstly it's a tax on the gain you make, not the total amount you sell something for. Secondly, not every gain you make is subject to this tax – there are some exceptions. You only pay Capital Gains Tax on the gain when you sell:

  • Personal possessions worth £6,000 or more, with the exception of your car.
  • Property that is not your main home – such as holiday homes, buy-to-let, land, business premises etc.
  • Your main home if you’ve let it out (this does not include having a single lodger), it's used for business or it's more than 5,000 square metres.
  • Shares that aren’t in an Individual Savings Account (ISA) or a Personal Equity Plan (PEP).
  • Business assets such as land, buildings and shares.

For full and complete definitions of these descriptions, its best to go direct to HMRC’s website.

When do I not have to pay Capital Gains Tax?

All UK tax-payers are entitled to an annual tax-free allowance (also known as Annual Exempt Amount - AEA) before they pay Capital Gains Tax. Check with HMRC what the current rate is, but for 2021/22 it is £12,300 (2020/21 it was £12,300). This means you can make a gain on any relevant investment, or sale of any personal possession and the first £12,300 of that gain will not be subject to tax.

You usually do not pay tax on any gifts between spouses, civil partners, or when you make a gift to a charity – irrespective of how much you gift. Gifts to others may be still subject to tax, but check with HMRC.

Any gains made from the following are also not subject to Capital Gains Tax:

  • ISAs or PEPs.
  • UK government gilts (including Premium Bonds).
  • betting, lottery or pools winnings.

How much is Capital Gains Tax?

A good question. The rate you pay will depend on

  • the size of the gain
  • your taxable income, and
  • whether the gain is from residential property or other assets.

To find out how much Capital Gains Tax you might have to pay, we recommend visiting the Gov.uk webpage.

What happens if I didn’t buy the asset?

If you have inherited an asset, or it’s a gift from someone then you won’t be able to calculate the ‘profit’ you’ve made since purchase. The HMRC therefore asks you to use the ‘market value’ for an item, where the market value is defined as: 

Finding the market value

Situation Use market value at
Gifts Date of gift
Assets sold for less than they were worth to help the buyer Date of sale
Inherited assets where you don't know the Inheritance Tax value Date of death
Assets owned before April 1982 31 March 1982

What about capital losses?

You can also, of course, make losses on assets that you may have bought. If this is the case, you can report it to HMRC to reduce the tax that you pay on your capital gains. Once you have reported it, HMRC will deduct this amount from the gains that you may have made in the same tax year.

Unused capital losses can be carried forward and used against capital gains in future years. Read more about this at www.gov.uk/capital-gains-tax/losses.