Your income tax band determines whether you are subject to a 10 percent or 20 percent tax on capital gains from the sale of shares. This manual walks you through the process of figuring out your bill.
Shares’ applicable rates for the capital gains tax
If you sell shares that you own and make a profit, you can be required to pay capital gains tax, sometimes known as CGT.
Your position within the income tax bracket determines the amount of tax that you are responsible for paying. In general, taxpayers who file at the basic rate are subject to a charge of 10 percent, whereas taxpayers who file at higher rates are required to pay a CGT penalty of 20 percent.
However, if you are a taxpayer who pays taxes at the standard rate, the gain you make could put you in a higher tax bracket if it is combined to the rest of your income. In this scenario, you would be responsible for paying a tax rate of twenty percent on the portion of the gain that is subject to the higher income tax band.
If your profit or gain is greater than the capital gains tax allowance, then you will be required to pay tax on the excess. This amount remains the same at £12,300 for the tax year 2022-2023 as it did for 2021-2022.
If you are part of a couple, you can maximise the value of both of your capital gains tax allowances by combining them.
It is possible to hold assets in joint names, as well as transfer assets to your spouse or civil partner in order for them to apply their capital gains tax allowance on the disposal of those assets.
When selling shares, funds, investment trusts, cryptocurrencies such as Bitcoin, or other financial goods for a profit, you will typically need to consider the possibility of being subject to capital gains tax unless the assets in question are kept in a pension or an Isa.
How can I figure out how much I owe in CGT fees?
To begin, it is important to be aware that there is no obligation to pay capital gains tax on shares or units that are kept in an Isa or pension.
However, if you own any other shares, the earnings you make from selling those shares could be subject to capital gains tax.
Though you sell shares of the same class in the same business, those shares are regarded to be equal, even if you purchased them at separate dates and paid different amounts. This is because they are considered to be part of the same firm.
This type of investment is referred to as a “Section 104 holding,” and the best way to determine how much each share in the holding is worth is to take its average price and multiply it by the total number of shares.
In order to determine whether you made a profit or a loss on the sale of the shares, you must first compare the shares that are being sold with the shares that you have previously purchased.
In order to accomplish this, the regulations governing taxes require that you match the shares or units you are selling with the ones you bought in the following sequence:
shares or units you buy on the same day shares or units you buy within 30 days following the day of disposal – this is known as the “bed and breakfasting rule” the rest of your shares or units – these are treated as being held in a pool and acquired at their average price as part of the Section 104 holding shares or units you buy on the same day shares or units you buy within 30 days following the day of disposal shares or units you buy on the same day
The bed and breakfasting rule may be applicable if the purchase of shares can be connected to the selling of shares that occurred during the subsequent 30 days. This indicates that the capital gains or losses on disposal can be determined by calculating the difference between the total profits from the sale and the cost of acquiring the asset in question.
Let’s say someone had 5,000 shares of one particular corporation.
On June 11th, they made a purchase of 200 shares, while the remaining 4,800 are being held in a Section 104 holding. On May 30th, the shareholder sold 2,000 of their shares.
Using the order described up top, the following is how the disposals would function:
No additional shares or units were acquired on the same trading day as the shares that were sold. However, in accordance with the bed and breakfasting rule, 200 of the shares that were sold can be matched against the 200 shares that were acquired on June 11th. The remaining 1,800 shares that were sold must be matched against the shares that were held under section 104.
Bed and Isa accounts allow for tax savings.
If you want to avoid paying capital gains tax on your investments, the easiest way to do so is to make sure that they are held in a stocks and shares Isa. In this type of account, any growth in the value of the investment is exempt from CGT, and any income from the investment, such as interest or dividends, is also exempt from taxation.
Each year, you are permitted to save or invest up to £20,000 in an individual savings account (Isa).
If you currently have investments, you won’t be able to move them into your individual retirement account (Ira). You might, alternatively, choose to sell the investments, deposit the proceeds into your Isa, and then use the Isa funds to repurchase the assets; this combination of transactions is referred to as a “Bed and Isa.”
Keep in mind that there are fees that may be associated with purchasing and selling, and that in most cases, you will be required to pay a somewhat higher price for an item when you purchase it than the amount that you will receive when you sell it.
There is also the possibility that the price will increase between the time that you sell it and the time that you buy it again, which could end up being expensive for you. On the other hand, if the price is reduced, that may work to your advantage.
Furthermore, if the gain you make from selling the shares is greater than the allowance you are given, you may be subject to a capital gains tax.
Talk to your provider before you start the process of opening a Bed and Isa account because many investment platforms have procedures that can simplify, speed up, or lower the cost of opening one of these accounts.
taxable capital gain on employee shares
You may be eligible to receive shares in the firm that you work for if your employer has an employee stock purchase plan.
If you sell your shares right away, there is a possibility that you may be required to pay a capital gains tax bill; but, regardless of the scheme, there is always the possibility that you will be required to pay a capital gains tax payment in the future.
The following are the primary types of employee share schemes that your company may provide:
Shareholder motivation programme (SIP)
When this occurs, either you are given shares that are held in the plan for you, or you purchase shares that are held in the plan for you.
There is no capital gains tax incurred either while the shares are still in the plan or when they are eventually transferred to you from the plan.
You will be considered to have acquired the shares at their current market value at the time of the transfer, and this value will be used as the basis for calculating any taxable gain or loss should you ultimately decide to sell the shares. This indicates that if you sell the asset right away, you shouldn’t have to pay any capital gains tax.
Invest a portion of what you earn (SAYE)
If you choose this path, you will put money aside on a regular basis in order to accumulate savings that will, after three, five, or seven years, be eligible for a bonus that is exempt from taxation.
At the conclusion of that period, you will have the option of taking your savings in the form of cash or investing them in the business owned by your employer at the price that was established when the plan was initiated.
When you sell the shares, you may have a gain or loss that is subject to taxation. This is often calculated by subtracting the price at which you purchased the shares from the sale price.
Plan for employee stock options at the company (CSOP)
You are given the option to acquire shares in the firm that you work for at a specific future date and at a set price; however, this price cannot be lower than the value that the shares were trading at on the date that the option was granted.
In the event that you exercise your option to purchase additional shares, you run the risk of realising either a gain or a loss that is subject to taxation.
In most cases, this is calculated by deducting the price at which you obtained the shares by exercising the option from the sale price, as well as deducting any amount that you paid for the option itself.
Enterprise-management incentive (EMI)
You have the opportunity to purchase shares of the company at a predetermined price on a predetermined date in the future.
This perk will count as part of your salary, and you will be required to pay income tax on it if the fixed price is lower than the current market value of the shares on the date that the option is given.
If you exercise the option, any gain or loss in value that results from the sale of the shares will be subject to taxation.
This is calculated by taking the sale price and subtracting the price at which you obtained the shares by exercising the option, any money you paid for the option itself, and any amount on which you paid income tax at the time the option was granted.
If you obtain employee shares from a SIP or SAYE plan, you can ignore any rise in value if you transfer them to an Isa or personal pension during the first ninety days after getting those employee shares.
When you eventually decide to sell the shares, you won’t be subject to any kind of capital gains tax because CGT exemptions apply to Isas and personal pensions. Take into consideration the fact that this also indicates that you will not receive any compensation for your losses.