In this article you'll learn:
- What capital gains tax is and how to pay it.
- How it applies to gains made through stocks and shares.
Introduced in 1965 to help reduce the practice of dodging income tax, capital gains tax is one of the core taxing methods of the UK government, pulling in billions of pounds every year.
And while you might not relish the idea of giving up even more of your cash to the state, capital gains tax's many rules and exemptions mean you may not have to pay quite as much as you first feared.
Recap: General capital gains tax rules
For most other assets (except property), capital gains tax is charged at either 10% or 20% (as of April 2016), depending if you are in the lower or higher income tax band. You also receive a £11,100 allowance, so you only need to pay the 10% or 20% on any amount over £11,100. You can also deduct any fees from your taxable amount.
Avoiding capital gains tax on shares
Not paying tax is a criminal offence, but equally there's no need to pay more tax than is required when selling stocks and shares. And there are ways you can lessen the amount of capital gains tax you pay.
- Gift the shares to your husband, wife or partner. You won't need to pay tax on this transaction, and it gives you the opportunity to double your tax-free allowance from £11,100 to £22,200 (your allowance, plus your family member's allowance).
- Split the sale across two different tax years. As your personal tax-free allowance resets at each new tax year, selling a part of your shares in March and then selling the rest in late April would make use of both tax years' allowance (£22,200 in total).
- Take a look at sell-and-buy-back techniques. These techniques involve selling your shares and then immediately buying them back using the proceeds of the sale. Popular options include selling and then investing in a tax-free option, such as an ISA or pension scheme.
When do you have to pay capital gains tax?
You DO have to pay capital gains tax on shares when...
- You own shares that aren't in an ISA. If you buy shares then sell them once they have risen in value, then you will need to pay capital gains tax. But if you have a stocks and shares ISA (which are usually tax-free) then you probably don't need to pay capital gains tax.
- You have interests in an investment fund or unit trust. If you've invested in an investment fund, then you will need to pay capital gains tax on any profits you make (over your £11,100 allowance).
You DON'T have to pay capital gains tax on shares when...
- You own shares through a stocks and shares ISA
- You cash in the first £50,000 of employee shareholder shares - Capital gains tax will apply above this limit.
- You have shares in an employer Share Incentive Plan (SIP)
How to pay capital gains tax
If you think you need to pay capital gains tax you'll need to register with HMRC for a self-assessment tax form (SA100), and also complete a supplementary form for capital gains tax (SA108).
If you're unsure if you need to pay capital gains tax or have questions about tax in general, contact Flying Colours on 0333 241 9900 for experienced, trustworthy financial advice.