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Introduction

Taxes on Stocks and Shares

In the UK, there are three types of tax an individual has to pay while trading shares – these three encompass capital gains tax, stamp duty, and income tax. An individual might have to pay Capital Gains Tax (CGT) if he/she makes a profit while disposing of or selling shares. Stocks and shares on which an individual may need to pay tax on include shares that aren’t in an Individual Savings Account (ISA) or Personal Equity Plan (PEP)

On the other hand, an individual does not have to pay tax if he/she offers shares as a gift to civil partner, wife, husband, or a charity . Additionally, an individual is not liable to pay Capital Gains Tax when he/she disposes of or sells:

  • Stocks or shares in employer Share Incentive Plans (SIPs)
  • Stocks or shares put into an ISA or PEP
  • Qualifying Corporate Bonds
  • UK government gilts together with Premium Bonds
  • Employee shareholder shares – this is subject on when an individual got them

Computing CGT on sale of shares

An individual will have to compute the gains in order to understand whether he/she need to pay Capital Gains Tax. The profit earned by an individual is generally the variance between the amount paid to purchase the shares and the amount an individual sold them for. In certain circumstances, an individual can opt for the market value of stocks or shares while computing the gain – this can be used if:

  • An individual owned them prior April 1982
  • An individual has given stocks or shares as a gift to someone apart from their spouse, a charity or civil partner
  • An individual inherited the shares and is unaware of the Inheritance Tax value
  • An individual incurred a loss i.e. sold them for an amount less than there worth
  • An individual acquired them through some Employee Share Schemes

In case the shares an individual held were sold to or given by someone who applied for Gift Hold-Over Relief, then in such a scenario an individual can use the amount paid by that person to compute the gain. Shareholders can use the CGT calculator to compute the payable Capital Gains Tax. The calculator encompasses the following steps:

1. Enter the date when the shares were sold or given away

2. Where the shares sold for less than they were worth to assist the buyer – state either Yes or No

3. In case an individual opts for Yes, then,

  • Provide information on the value of the shares when they were sold – An individual can get this information from the stock exchange or consult the fund manager or stockbroker. Also, if an individual owned the shares with someone else, then he/she should enter the value pertaining to his/her portion of the shares In case an individual opts for No, then,
  • Provide information on the selling value of shares – if an individual owned the shares with someone else, then he/she should enter the value pertaining to his/her portion of the shares

4. Provide information pertaining to how much was paid in costs when the shares were sold (this will encompass the cost for stockbroker fees). Also, if an individual owned the shares with someone else, only enter the portion of the costs as agreed with co-owner

5. Where the shares purchased before 1 April 1982 – enter Yes or No

6. Where the shares inherited – enter Yes or No

7. How much was paid to purchase the shares

8. How much was paid in costs to purchase the shares – this encompasses stamp duty and stockbroker fees. Also, if an individual owned the shares with someone else, only enter the portion of the costs as agreed with co-owner Below mentioned table is cited as an example:

When did an individual sell or give away the shares 1 January 2018 Option to change the value
Did an individual sell the shares for less than they were worth to help the buyer No Option to change the value
How much did an individual sell the shares for £10,000 Option to change the value
How much did an individual pay in costs when you sold the shares £12,000 Option to change the value
Did an individual own the shares before 1 April 1982 No Option to change the value
Did an individual inherit the share No Option to change the value
How much was paid to purchase the share £6,000 Option to change the value
How much was paid in costs to purchase the shares £7,000 Option to change the value

Basis the information provided in the above table, the Capital Gains Tax to pay for the 2017 to 2018 tax year is equivalent to £0.00. Total loss is as follows:

Particulars Value (in£)
Value when the shares were sold 10,000
Minus the value of the shares when the shares were acquired 6,000
Minus all costs 19,000
Total loss 15,000
Deductions
Capital Gains Tax Annual Exempt Amount used 0
Total deductions 0
Taxable gain 0
Tax to pay 0
Tax to pay 0
Remaining deductions
Annual Exempt Amount left for the 2017 to 2018 tax year 11,300
Losses an individual will can carry forward from this calculation 15,000

Additionally, there are certain special rules that can be used computing the value of shares that an individual sells:

  • Employee share scheme shares
  • Stocks or shares an individual purchased at varying prices and times in one company
  • Shares after a company’s merger or takeover
  • Shares through an investment club

Understanding ISA (Individual Savings Account)

ISA or Individual Savings Account is a special type of investment and savings account which is mostly exempt from tax. A stocks and shares ISA enables an individual to invest their money in the share-market, rather than merely saving it. An individual can make an investment up to £20,000 in shares and stocks ISA for tax year 2017/18 – tax year runs from 6 Apr-17 to 5 Apr-18, and the similar amount can be invested for 2018/19. An individual can invest the amount into shares of any company on the London Stock Exchange’, or into any fund in the UK. As per a recent change in the rule, made in 2013, an individual can put AIM shares into an ISA as well. Once an individual’s investment is securely protected within a share ISA, it is protected from both capital gains tax (CGT) and income tax

  • Income tax: The income tax remunerations of share ISAs are less prominent than for cash ISAs and, currently, only higher rate taxpayers benefit. Outside of an ISA, an individual does not pay any taxation on dividends if he/she is a standard-rate taxpayer – this means there’s no income tax benefit in holding them within an ISA. However, tax benefits are enjoyed by higher rate taxpayers as they don’t have to pay any added tax on their dividends, as they might do in case the shares were detained outside of an ISA. For example, in case a higher-rate taxpayer received £100 of dividends from investment outside of an ISA, he/she would pay an added tax of £25
  • Capital Gains tax: A major tax advantage that share ISAs offer is protection from CGT. If an individual makes a small once-in-a-lifetime investment in an ISA then it is doubtful that he/she will save much in the way of CGT – each individual is permitted to make a certain amount of CG every year before he/she has to pay anything (the limit is £11,300 for 2017/18). Since the Capital Gains rate has increased to 28% for higher earners, opting for ISAs year after year can help an individual avoid a considerable CGT bill
  • Stamp duty: Stamp duty payment is a mandate and is charged at 0.5% - no stamp duty is charged on sale of shares

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