Investment clubs

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22. Tax

Individuals who invest in shares are potentially liable for two kinds of taxation: income tax on dividends and capital gains tax on gains made when they sell shares at a profit.

The points to remember are:

• Investment clubs have to complete special returns to their local tax office giving details of their investments, disposals and income during the year
• The club itself is not liable to income tax or CGT - its members are individually
• Members have to add their share of the club's income and capital gains to their income and gains outside the club, and submit a tax return that covers everything

To ensure that tax matters are dealt with efficiently:

1. The treasurer of the club should tell his local tax office about the formation of the club as soon as it is set up. If the tax inspector doesn't know the rules pertaining to investment clubs, refer him to reference CG20600 of the IR Capital gains Tax manual. Ask for copies of Forms 185-1 and 185-2.
2. In each tax year the Treasurer has to complete Form 185-1 which details:
   • the shares bought by the club during the financial year, the price paid, and any ancillary charges like broker's commission and Stamp Duty. Click here for an example.
   • the shares sold by the club during the year and their acquisition cost (used to calculate CGT)
   • income received by the club during the year, including dividends, interest on bank accounts, and interest on bonds. Click here for an example.
   • names and addresses of all club members, and the share of income and gains apportioned to each based on the unit valuation system. Click here for an example.
3. The Treasurer also has to complete Form 185-2 for each member. This form details the overall income and gains for the club in the tax year, and the apportioned income and gains for each member.
   • The treasurer completes a form for each member for each tax year
   • He sends a copy of the forms to the local tax inspector
   • He sends a member's copy to each member

   Click here for an example of form 185-2.

4. Each member then uses the information in the form for his own tax return. In other words, income he has received from the Club is added to his other income during the year, and capital gains are added to his other capital gains. His personal liability is calculated on the total figures.

1. What is an investment club? 2. A simple explanation of how it works 3. Why join an investment club? 4. Deciding on your aims 5. Joining an existing club 6. Preparing to launch a new investment club 7. The draft constitution and rules 8. Drafting the investment strategy 9. Example of an investment strategy 10. Attracting members to your club 11. Preparing for the inaugural meeting 12. The inaugural meeting - appointment of officers 13. The inaugural meeting - key decisions 14. Things to do after the inaugural meeting 15. Starting the processes 16. Running the first meeting 17. Regular meetings - the key to success 18. The cash account 19. The capital account 20. The asset register 21. The annual general meeting 22. Tax 23. Performance measurement 24. Dealing with a member leaving 25. Conclusion

• ProShare Investment Clubs Looseleaf Manual
• Fool's Guide to Investment Clubs