Capital Gains Tax when withdrawing from a stocks & shares ISA in the UK

Question

Capital gains tax is due on gains made investing in stocks / shares in the UK.

So in theory if I were to invest £20,000 and the value of the shares were to increase by 10x and I sold at £200,000, I would be liable to pay £36,000 (based on the higher rate tax bracket of 20%, after subtracting the £12,000 Annual Exempt Amount from the gain of £180,000).

If this was in a Stocks and Shares ISA would the gain be tax free?

Can anyone explain if this profit could then be invested into a different stock (while remaining in the ISA wrapper) without any tax liability?

Also if the full amount (£200,000) was withdrawn from the ISA, would it then be liable for capital gains tax? Or if £12,000 (Annual Exempt Amount) was withdrawn each year would this negate the need to pay tax on it?

Apologies if my figures are off, this is new to me / figures were calculated using the uktaxcalculators website.

Answer 1

TL;DR: If the gain was made within an ISA, no CGT will be due, whatever you do with the money. You can keep it in the ISA (by reinvesting in other stocks) or withdraw it to "a normal bank account"¹.

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First, it should be noted that the chance of your shares increasing in value ten-fold (in a reasonable time period) is very remote... it would need a 26% rise every year for 10 years to do this. Even over a "working life-time", it would need a sustained growth of about 6% for 40 years. And, of course, by then the tax-system could have changed out of all recognition!

That aside, you are correct that any gains on investments within an ISA are tax-free. As the Full ISA Guide on Money Saving Expert includes:

Tax benefits of a stocks & shares ISA:
Placing investments inside an ISA wrapper provides three tax advantages:

• No tax on profits. You don't have to pay any capital gains tax on profits made from share price increases.

  Invest outside an ISA and any profits made above the annual capital gains tax allowance (£12,000 for 2019/20) would be subject to tax at 10% for basic-rate taxpayers and 20% for higher-rate and additional-rate taxpayers. You make a profit when you sell a share for more than you bought it for.

• No tax on interest earned on bonds. You get to keep it all.

• No tax on dividend income. Inside an ISA, you don't pay tax on dividends. Outside an ISA, you'd get a £2,000 dividend income allowance, and above that basic-, higher- and additional-rate taxpayers would pay 7.5%, 32.5% and 38.1% respectively.

Capital Gains Tax is (normally) payable when you realize a gain (i.e. sell an asset that has gone up in value). As HMRC puts it on their Capital Gains Tax page:

Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value.

It’s the gain you make that’s taxed, not the amount of money you receive.

However, if that gain is made within an ISA wrapper (or under some other circumstances), no CGT is payable. Once that "disposal" has happened (whether or not it attracted CGT), that is the end of the matter as far as tax is concerned.

If you chose to take the money out of your ISA, then that in itself won't cause a tax liability. However, once out of the ISA you will have lost its tax-free protection, so anything new you do with the money might – at some later date – attract tax (for example, capital gains tax, or tax on interest). For this reason, if you were selling the original shares to reinvest within the ISA, you may need to make sure that your ISA provider understands this and doesn't treat it as a withdrawal.

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¹ Obviously, if you later do something else with the money that does attract tax, you will have to pay.

Answer 2

Yes – the gain would be tax free in the ISA scenario.

And yes, it could be reinvested into a different stock, while remaining in the ISA wrapper, and you could go on making tax-free gains with the proceeds.

In this scenario, withdrawals from the ISA are irrelevant for Capital Gains Tax purposes. (They do matter in a different way though; see below).

What counts is:

• the amount of the gain at the point the gain was made (i.e. when you sold the shares – not when you do something else with the money such as withdraw it to a bank account)
• whether your gains for the year exceed the Annual Exempt Amount
• whether the shares were held in a tax-free wrapper such as your ISA – this overrides both the above points. (This assumes you meet all the technical conditions, e.g. you didn't pay in an amount that exceeded your ISA allowance in a tax year.)

So yes, within the wrapper you can keep reinvesting capital gains. And if your eye for a stock pick is good enough that you can identify another 10x return ;), your next £1.8 million capital gain could be tax-free too… That's the beauty of ISAs!

On to the matter of ISA withdrawals…

Whether you withdraw or invest the money doesn't change your Capital Gains tax liability at all.

However, remember that withdrawals will of course mean that you have lost the tax shelter over that money – i.e. you couldn't put the same amount back into an ISA. You would have to build your ISA back up by subscribing no more than £20,000 a year, just like anyone else.

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Regarding the idea of taking staged amounts of £12k a year…

As covered above, this doesn’t matter in the ISA scenario from your question. However, suppose you were £180k up on shares held outside an ISA. Rather than realise the gain (ie. sell the shares) in one transaction, a strategy to minimise Capital Gains Tax would be to sell smaller amounts so that you incur gains of no more than £12,000 (or the prevailing Annual Exempt Amount) per tax year (not per transaction). This would ensure you always make use of that full threshold and hopefully pay zero tax. However, of course it'd take you more than a decade to sell it off, and a lot could happen (to rules, tax rates, not least to the share price) in that time.