Page 11 – Wise Investor Path

Capital Gain tax (CGT) is a tax you pay on the gains you have made by selling or disposing an asset. Disposing an asset includes selling it, giving it away as a gift, swapping it with someone else, or getting compensation of it, like an insurance pay out when it’s lost or destroyed.

Capital gain is the difference between what you have paid for the item and at what you have sold it. However, in certain cases, you need to use market value of the item instead of the amount you have purchased it for, and these are:

It was a gift,
You sold it less than the worth,
You inherited it,
You owned it before April 1982, or
You acquired the shares through certain Employee Share Schemes.

You pay CGT on the profit you have made, as an example if you have purchased an asset at a cost of £10,000 and sold it at a cost of £20,000, then you pay CGT on the profit amount £10,000 (i.e., £20,000 – £10,000). You pay CGT if sum of all your gains, excluding the assets which are tax-free, in a year is above the tax-free allowance. Capital losses incurred from the sale or disposal of assets can be used to offset capital gains, reducing the overall tax liability. Unused losses can often be carried forward to future tax years.

Capital gains above the annual exempt amount (£3,000 for tax year 2024-25 and £6,000 for the tax year 2023-24) are subject to CGT at various rates depending on the individual’s income tax band.

10% for basic rate taxpayers.
20% for most assets for individuals at higher rate and additional rate taxpayers.
28% for residential property and carried interest (profits from certain types of investment funds) for individuals at higher rate and additional rate taxpayers.
Additional rate taxpayers, those with taxable income above the additional rate threshold, may pay capital gains tax at the higher rate of 28% for most assets and 36% for residential property and carried interest.
If you are a trustee or personal representative of someone who has died, the n you pay 28% on residential property and 20% on other chargeable assets.

How to calculate if you need to pay CGT on your gains in a year?

Let’s understand how you can calculate the tax you own to HMRC.

Let’s suppose your total income for the tax-year 2023-24 is £50,000. Deduct the tax-free personal allowance from this and now your taxable income is: £40,000 – £12,570 = £27,430.

Your total gain for the year is £10,000. Now deduct the tax-free allowance from the amount for the year 2023-24: £10,000 – £6,000 = £4,000. So, your total taxable gain is £4,000.

Now add the taxable income to understand under which tax rate band you fall for the year 2023-24: £27,430 + £4,000 = £31,430.

This amount is less than 37,700, which falls under basic tax rate band, which means you will pay 10% CGT on the gains, i.e.,

Tax on CGT = 10% of £4,000 = £400.

On What Assests you PAY CGT	On what Assets you DO NOT PAY CGT
Personal possession worth more than £6,000, except your car	Gifts to your husband, wife, civil partner, or a charity
Additional property other than your main house	Total gain below tax-free allowance.
On Mian house if you have let it out, used it for business purpose or it’s very huge.	Gains made from ISA or PEP, UK government gilts and Premium bonds, or betting, lottery or pools winning.
Any shares that are not ISA or PEP	When you inherit an asset when someone dies.
Business shares
Overseas assets
If you are abroad, you need to pay CGT on property or land in the UK	If you are abroad, no CGT on few assets like company shares.

You must report and pay any Capital Gains Tax to HMRC due on UK residential property within:

60 days of selling the property if the completion date was on or after 27 October 2021
30 days of selling the property if the completion date was between 6 April 2020 and 26 October 2021

Buying a house is personally and financially one of the most crucial decisions. Statistically it is an important financial goal of about 70 percent of the working population and nearly 80 percent of the working population takes mortgage to buy their houses. So, the most responsible thing to do would be to know about various aspects about mortgages as this is the decision that can impact your future decisions. As you will be the one who would be paying this for a decided tenure you must decide all the factors before getting a mortgage.

What is a mortgage?

A mortgage is an agreement between you and a lender keeping property as a collateral. There are various banks which offer mortgages in the United Kingdom like Barclays, HSBC, Santander, NatWest, Nationwide etc. Having a thorough knowledge about the types, interest rates and benefits can help you in picking up the right one for you.

Types of mortgages

The first step in deciding which mortgage will be the best option for you as per your needs and preferences would be to understand various types of mortgages offered by various retail banks.

Fixed rate mortgages: Fixed rate mortgages are the mortgages having fixed rate throughout the mortgage term. It gives you a relief that your mortgage rate will not change as per the ever-changing market rates. The mortgage rate is set above a defined standard rate and is locked for the tenure of the mortgage. It is the most frequently bought mortgage as the normal working class do not shuffle their property. People tend to buy this mortgage more as they can easily calculate how much they would be paying.

Tracker Mortgages: These are mortgages which tracks Bank of England’s base rate which is the interest rate at which other banks borrow money from Bank of England. So, your interest rate can be either slightly higher or lower than the base rate. Introductory rates are lower than other mortgages. It gives you the independence of overpaying your mortgage reducing your overall interest. You can enjoy the flexibility of changing into the fixed mortgage if the interest rate goes up.

Discounted rate mortgages: Discounted rate mortgages do just what they are named to do that is to provide you a discounted rate for your mortgage but that is only for a limited initial period. The mortgage will be changed to standard variable rate once the initial offer expires. The best way to use a discounted mortgage would be remortgage the property with a different lender. You should only consider the discounted rate mortgages if you have planned for increase in installment amount once the time for early discounted is over.

Standard variable rate mortgages: Its a mortgage where you are paying installments as per the lender’s standard variable rate. The interest rate can change at any time depending on various market factors. These mortgages can be expensive as the standard variable rates are usually greater than standard base rate. It is best suited for customers who are planning to pay off their mortgage early and have planned for any increase in your interest rate.

Buy- To Let mortgage: This mortgage is suitable for people who are looking to rent out the house that they are going to purchase and want to take mortgage on that property. Lender’s usually have a certain criterion for such mortgages and there some additional charges associated with these mortgages as well. So, if you are planning to get this mortgage make sure that you have done your research and weighed your pros and cons effectively to make the right decision in selecting the lender.

Help- To -Buy mortgages: These mortgages are basically the government schemes which helps the first-time home owners to get the mortgages at a very low rates and at a very less deposit as well. However, there can be some regional limitations and there is a fixed number of people who are selected under these schemes. The advantages of these mortgages include a very less deposit of only 5 percent, low mortgage rates, interest free payments for five years, low rate of interest when you start to pay, flexibility to pay off equity loan any time. However, there are some cons associated with them such as repayment amount is not fixed, possibility of increase in interest rates, availability only on new constructions, difficulty in remortgaging and risk of negative equity.

Shared ownership Mortgage: This is the best mortgage if you are on a tight budget as you will be paying the mortgage for the part of the property that you own and the rent of the part which you don’t. the most amazing feature of this mortgage is staircasing in which you can increase your ownership as per convenience by increasing the amount of your mortgage. There is an income criteria and requirement of a good credit score for this mortgage. The advantages include opportunity to get a house at a very less deposit, ability to staircase your way to complete ownership, potential of making profit if decide to sell the property and if you are military personnel, you get priority over other groups of people for these schemes.

These are various mortgages offered in the United Kingdom. It is very easy to get confused in making the decision about the selection of the mortgage that will suit your needs best. But you do not to worry as in the next blog we will be diving deep into the factors that you should consider before getting a mortgage. So, keep following the blog as it is your money and you must use it wisely.

Making the correct selection of the mortgage as per your financial health and goals is the most important decision that you need to take in the process getting a mortgage for yourself. This selection process can be broken in to two step first being knowing the various factors that lenders consider and second step would be to completely evaluate the factors you should consider before getting a mortgage.

Factors that lenders consider to evaluate eligibility

Debt to Income Ratio (DTI: This ratio compares your monthly debt to your gross monthly income. It is a very good indicator of how much installment each month you can accommodate in your current income monthly. It consists of two ratios first being Front- end DTI which compares your house related expenses to your monthly income and second is Back-end DTI which included all your monthly debt obligations including your existing mortgages, personal loans, credit card payments, car loans etc. Lenders usually prefer a lower debt to income ratio as it shows your capacity to include monthly mortgage payment into your existing monthly obligations.

Loan to Value Ratio (LTV): It is the value of the amount of your mortgage divided by appraised value of your house. Appraised value means the value that an appraiser evaluates for your house which means the raw value which does not includes additional values including decors etc. This ratio indicates the comparison of your down payment and risk associated with the payments of the mortgage. Lenders use this ratio also to make the decision that whether they would require private mortgage insurance for your mortgage and to make the ultimate decision to give you a mortgage or not for your house. Higher the ratio lesser is the down payment and greater is the risk associated with the mortgage.

Credit Utilization ratio: This is simply the ratio of credit you are currently using to the total credit that is available to you. This is ratio is directly linked to your credit score which directs effects your ability to become eligible for the mortgage and interest rate of the same. Lower credit utilization ratio is preferred, credit utilization ratio below 30 percent is considered ideal to qualify for the mortgage.

Housing expense ratio: It your monthly housing expenses including your mortgages payments, property taxes etc. divided by gross monthly income. This ratio gives lenders a comprehensive idea about how much of your earnings go towards your housing related expenses. Lower this ratio is better is financial stability and greater is your ability to own a house.

Cash flow coverage Ratio: This is mostly used in real estate financing it is defined as property’s net operable income divided by mortgage debt service (Including principal and interest payments). It helps the lenders to assess the property’s potential to generate income to cover debt obligations.

Payment to Income ratio: This ratio measures percentage of your income going to the mortgage payments. It does not include other debt obligations like personal loans, credit cards, car loans etc. This ratio gives lenders idea that you would be afford the mortgage in your present monthly income.

Personal financial factors that you must consider

Financial readiness: It is very important to consider your employment and income stability along with your existing debts get a comprehensive idea in determining the size of mortgage that you can afford comfortably without any stress. Lenders do calculate your debt-to-income ratio to be certain about your affordability for the mortgage but you must make sure that you have a complete idea that how much bigger hole the mortgage payment will be making financially each month in your earnings.

Credit Score: Credit score is a number on a defined scale which represents how well you manage your debts. Lenders are willing to lend their money to the applicants that is how they will earn money by getting interest on the money. All they want to make sure is that there is minimum risk of default from the customer and a customer with a good credit just provides that assurance.

Down Payment: Housing mortgages have some amount associated with it which is called down payment which you are supposed to pay upfront. The more you will be paying as a down payment the lesser amount will be charged interest for the tenure of your mortgage and lower would be your installments.

Interest rates: Your research about the interest rates will save money you will be paying through your tenure of mortgage. It is very crucial to browse through the interest rates as a small reduction in the interest rate will save money and will result in lower monthly payments. As its your money you cannot afford to be lazy in this aspect.

Closing cost and other fees: You must be aware how much it will cost you if you want to close the mortgage early and what are the various fees that the lender would be charging you like the loan fees, insurances, property taxes etc. As no body likes to be see additional amount when they are at the closing stage of their mortgage.

Clarity of your future plans: By this we mean that you must be clear with the purpose regarding the property for which you are getting the mortgage. As this will be the deciding factor for the mortgage type you should go for. As if you are planning to shuffle the property and make some benefit out of it discounted rate one would be the best option.

Financial stability: This factor must be considered even before you are planning to get a house and an analysis must be done in order to know whether it is the right time, do have the required down payment and are you ready to the extra load of the monthly payments. As this analysis defines your capability to responsibly manage your mortgage.

You must consider the factors listed as it is your money and you are decision maker about the mortgage that you are planning to take. One wrong decision can lead to a domino effect in finances and you should not be the suffering the consequences of lack of awareness.

Managing your finance starts with getting a checking account which will act as a transactional focal point as you can easily track your income and expenditure. Checking accounts comes with basic features like debit card, online banking and chequebook. Some banks do offer additional features like overdraft and if you are maintaining your credit score well banks usually review accounts to provide finance benefits like personal loans as well. To get the best advantage of the available options careful analysis of a few factors must be done to select the checking account that best suits your needs.

Understanding Checking accounts

In United Kingdom checking accounts are commonly known as the current accounts which is simply an account where your salary is credited. These accounts provide debit cards to enable easy access to your money. This account may provide you with an overdraft facility depending upon the analysis of your credibility by the bank. Some banks may even charge you a fee for keeping a current account and in return you can get various benefits like rewards for spending using your debit card and even insurance offers in some cases.

Key Factors to Consider

Fees: Banks might charge you for monthly maintenance of your account, any overdraft facility that may choose, monthly charges for your debit card. Hence this has to be the first item in your checklist that you should be done with in the process of consideration for your checking account.

Interest Rates: We all want our money should earn some amount of interest if it is in our checking account. Hence it is important to choose the account giving better interest rate than the other options available.

Access to ATMs: A decent enough network of ATM machines is a factor that you cannot afford to miss. Banks with a decent network of ATMs give more accessibility to your money if cash is required for transaction.

Online and Mobile Banking: This is the feature that can make any bank stand out from its competitors as an efficient online banking system is bound to make customers attracted towards the bank’s services. If this efficient online banking service is combined with a responsive mobile banking service you have the bank of your dreams for your checking account.

Branch Availability: In this modern age of banking, it depends whether you are an old school customer who likes to get to his bank’s nearest branch and get your issues resolves or you are a person who likes to call customer service for answers. If you are the former one you should select the bank with better network of physical branches near your house.

Customer Service: An efficient and effective customer service is clear indicator of any bank’s service quality. A responsive customer service distributed among various communications channels means your bank takes its customers seriously.

Types Of Checking Accounts

Basic Checking Accounts: As the name suggests these are account basic account services and have very less to no requirements for maintenance. Best suited for you if you only need an account transactional purpose.

Interest-Bearing Checking Accounts: If you are an someone who usually maintain a fairly large balance in your account than this is the account for you. Even though the interest given is not as large as provided by the savings account you will earn some interest on your account balance each month.

High-Yield Checking Accounts: As the name suggests these accounts maximize the earning potential of their account balance. However, these accounts do have some requirements like minimum balance and initial direct deposit.

Student Checking Accounts: As the name implies these are tailor made for students’ requirements as they provide benefits like no monthly fees associated, no minimum balance requirement and usually come with an overdraft protection. The reason for the popularity for these accounts is that they provide what is required for their target population.

Online-Only Checking Accounts: As the name says online only accounts, these are accounts provided by banks operating exclusively online. These accounts have exceptionally efficient online and mobile banking capabilities. They make up for the lack of physical presence by providing low fees and high interest rates for their customers. Some of these accounts may provide interesting reward earning schemes as well.

Tips for selecting checking account

Selecting the checking will have an effect on your financial health and it will decide the course of your financial journey. As you will be frequently dealing with your checking accounts it should be convenient to use. It must align with your banking needs like how much you want to keep in the accounts, what rewards and features are you expecting. Now as you will be using the checking account for a relatively longer there should be ideally very less to no fees associated with the checking account and it should have a minimum balance requirement.

As you would be monthly transacting with this account it should have a robust security mechanism, an efficient identity theft protection. It must have desirable features like free checks, redeemable rewards, travel insurance. In this modern age it is not unfair to ask for an account which has efficient online banking and mobile banking system to give that ease of access. A well distributed network of physical branches and ATMs should also be a factor in your consideration because someone in your family may also need a checking account who is old and is not tech- savvy.

Your bank account must have a responsive and caring customer service which can support your needs on a 24/7 basis so that your financial queries would be resolved with the highest priority. Finally, it must have high ratings and has to be recommended financial institution.

If you are selecting your checking account provider carefully a major portion of financial worries is taken care. As this is the decision which will not only save you a great deal of money but will also open new horizons as most of the checking account providing financial institutions have investment services which can give you an edge in your journey towards your financial goal.

Investing means using your capital which can include time, effort, money etc. to work with the expectation of getting a larger payout in future. Investing is the most important step in the wealth creation as the entire outcome of an individual’s financial planning depends on effectiveness and efficiency of their investing behaviour and investing strategy. Retail banking products can be a good start for individuals who has little to no knowledge of finance domain. In this blog we will try to comprehend different types of investment products available and how you can start your investment journey.

The goal of investing can be either to grow wealth or achieving a financial goal, such as retirement savings, wealth preservation, or preparing for a major life event like marriage, buying a house or education. It is essential to invest early to take the benefit of your best friend which is compounding.

There are various retail banking products available with banks that can offer investment solutions to an individual based on their risk appetite, financial goals and their investing preferences. It once again converges to one’s ability to do research about various investment instruments and find out which is the best tools that will maximize the returns and will help in achieving financial goals with minimum risk.

Understanding the spectrum of retail investment products

Savings Accounts: This is the retail banking investment product that we all are familiar with. Savings accounts usually have very less to no minimum balance requirements and you can withdraw up to a certain limit very easily. The interest rates on savings are generally less than other investment tools but your money is not subjected to markets risks. They provide exceptional liquidity for any emergency needs and can prove to be a very good option for short- term financial goals.

Certificate of deposits (CDs): These are basically the time deposits provided by the banks in return for locking the customer’s money for a specific time. The interest rates are better than savings bank accounts however the liquidity of your money can be a concern as your amount will be locked for a fixed period of time, as there is a penalty involved if you want to withdraw your money before the maturity of your investment in this saving tool. The good news is that they are nearly risk free as the money invested is insured in case of closure of the financial institution. There are various strategies by which you can maximize the return of your investment in this tool and increase liquidity of your invested money. We will discuss these strategies in detail in later blogs.

Money Market Accounts (MMAs): Money market accounts are provided by various banks and credit unions which will help, like deposit accounts they are also insured. Money market accounts usually limit the number of withdraws, but it solely depends on the institution. These accounts also usually require a minimum balance requirement. They are better than savings accounts in both liquidity and earning potential as they offer check writing facilities. These accounts are best suited for the conservative investors seeking fairly decent returns and stability.

Mutual Funds: Mutual funds is an investment tool that will add your amount invested into a pool of capital along with other investors and that capital is used to purchase stocks, bonds or other securities. Investors are not be investing in the securities directly they are in fact buying shares in mutual funds. Mutual funds allow investors to create a diverse portfolio to mitigate risk and increase the possibility for greater profit margins. Fund managers of mutual funds handles the pool of capital accumulated in mutual funds as they have the expertise for financial analysis.

Annuities: Annuities offered by the banks can be an excellent tool if you are looking to get a fixed income after you retire. The money you have saved your working period can be invested in annuities and then can be received as a yearly pension for either your lifetime or for any fixed time that you have decided. Annuities can be majorly either fixed, variable, indexed, immediate or deferred, it solely depends your financial needs and your risk appetite which one you want to opt for your retirement. Investment in annuities is best suited for investors looking to get a steady income and protection against longevity risk after their retirement.

Stocks and Bonds: Retail banks provides the brokerage services to the customers which means that the banks will act as mere brokers in the trade of their stocks and bonds. Stocks means buying share of the company hence you are investing your money to grow with the success of a publicly traded company however investing in bonds means that you are investing in debt of a company which means that you are helping and organisation to raise money and they will pay you back once your bonds will mature along with the interest defined by them. Combining stocks and bonds in your portfolio can enable you to create a diverse portfolio which will help you in mitigating the risk and maximizing the profit for your investments.

Getting Started with Retail Banking Investment Products

Define your goals: Your financial goals must be clearly defined, which includes defining the amount that you want from your investment, deciding the time frame for achieving the amount that you have decided and quantifying risk by deciding when you will exit the investment if losses hit a predefined maximum value.
2. Know the investment landscape: Dedicate time to learn about the investment products, strategies, money markets, capital markets etc. Learn about shares, stocks, derivatives and do a comparative analysis about where you will get maximum value of your money at a minimal risk. Define your risk level and invest accordingly as it is your money only you are responsible for it.
Seek Professional Guidance: Even if you have knowledge about the investment products and strategies, taking help or consulting a financial advisor will always give you an extra edge as you will always some extra knowledge about the current trends and future prospects.
Start small: Start your journey with the small investments by creating a diverse portfolio so that risk is mitigated. Once you are comfortable with the analysis and understand the market well only then increase the amount to be invested.
Monitor and Adjust: Create a system to monitor your investment portfolio periodically and analyse whether your investments are working in accordance with the goals defined if not then adjust them in accordance with your financial situation, market conditions and most importantly your financial goals.

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