Does Tax Apply to Marketable Securities?

Yes, tax does apply to Marketable Securities. Marketable securities quickly and easily convert into cash due to their high liquidity. Common stocks, treasury bills, and bonds, traded on public stock exchanges, are examples of marketable securities.

Due to their liquidity and high demand, marketable securities are an attractive option for investors needing quick access to cash.

Tax Implications for Marketable Securities

The type of security and the duration of holding it determine the tax treatment of gains or losses from marketable securities. The taxation of different marketable securities generally follows these guidelines:

  • Stocks: When you sell stocks, the profits are subject to Capital Gains Tax. The rate is determined by whether the gains are long-term (held for more than a year) or short-term (held for a year or less). Long-term gains usually benefit from a lower tax rate compared to short-term gains.
  • Bonds: You typically pay taxes on interest received from bonds as ordinary income. However, certain government bonds, like municipal bonds in the UK, may be exempt from some taxes, making them an attractive option for tax-efficient income.
  • Treasury Bills (T-Bills): You also pay taxes on the interest from T-Bills as ordinary income. You earn interest on T-Bills from the difference between the purchase price and the redemption value, which is subject to Income Tax.
  • Exchange-Traded Funds (ETFs) and Mutual Funds: HMRC will treat these similarly to stocks for tax purposes. Capital Gains from selling ETFs are taxed depending on the holding period, and dividends received are taxed as income.

All Taxes Involved

Investing in marketable securities involves various tax implications that can affect your returns. Here are the primary taxes to be aware of:

  • Capital Gains Tax (CGT): Applies when selling securities at a profit. The tax is based on the difference between the selling price and purchase price, after deducting allowable expenses.
  • Dividend Tax: Earned from owning shares, taxed at varying rates depending on your income level—8.75% for basic rate taxpayers, 33.75% for higher taxpayers, and 39.35% for additional rate taxpayers.
  • Income Tax: Charged on interest received from bonds and other income-generating securities. The rate depends on your total income.
  • Stamp Duty: Incurred when purchasing shares in UK companies, calculated at 0.5% of the transaction value.
  • Tax-Efficient Investing:
    • Individual Savings Account (ISA): Use an ISA to hold securities and benefit from tax-free gains and income.
    • Pension Contributions: Invest in securities within a pension to enjoy tax relief on contributions and tax-free growth.

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