Capital Gains Tax on Shares

Capital gains tax (CGT) is a tax that is charged on the profit made from selling or disposing of an asset that has increased its value since you purchased it. Whilst this can apply to assets such as artwork, cars, cryptocurrency, and property, we are focusing on capital gains tax on shares.

Do you need to pay capital gains tax on shares? 

You may need to pay CGT on the shares you own if you sell them for a profit. CGT on shares is charged at either 10% or 20% and this is dependent on the income tax band of the owner. As a general rule of thumb, those who are classed as basic rate taxpayers are charged 10%, with higher rate taxpayers paying 20%.

Having said this, it isn’t always as simple as this. If the person in question is a basic taxpayer but the gain they have received from selling the shares has pushed them into the higher bracket, they will pay tax at 10% up to the basic rate band and 20% thereafter.

What is the capital gain allowance? 

Not all shares will have capital gains tax applied to them, even if a profit was made. This is because of the capital gains tax allowance which is currently £12,300 in the 2022-2023 tax year. CGT will only be applied on gains that exceed this amount.

Married couples can combine their allowances together to get the most from selling their shares. You can hold assets in joint names if necessary and assets can also be transferred to a spouse to enable them to use the allowance.

Are there any exceptions? 

There are some exceptions to the rules stated above. No capital gains tax is payable on shares that are held in ISAs or pensions, regardless of the amount.

Bed and ISA 

As we mentioned before, one way to avoid paying CGT on your shares is by ensuring your investment is in a stocks and shares ISA. Individuals are currently allowed to invest up to £20,000 in an ISA during each financial year. It is not possible to simply transfer into your ISA if you already hold an investment. What you can do is sell them, transfer the money you receive into your ISA and use this to buy the investment back. Whilst this method can incur charges, the two transactions are carried out together meaning there is less exposure to movement in the market. This method, known as Bed and ISA is a common method for those that want to take advantage of tax benefits in your ISA but don’t have readily available cash to invest.

Employee Share CGT 

Many companies now have an employee share scheme as it is a common additional benefit to employee packages. The main schemes include:

• Save As You Earn (SAYE)
• Share Incentive Plan (SIP)
• Enterprise Management Incentive (EMI)
• Company Share Option Scheme (CSOP)

Depending on which scheme you are part of, there is a potential of having to pay capital gains tax if you sell your shares immediately. There could also be a possibility of CGT applying to all schemes if you decide to keep the shares initially and then sell them at a later date.

For SIP and SAYE schemes, increases in value are ignored if they are transferred into an ISA or personal pension within 90 days. If this happens, there will be no Capital Gains Charged at all due to the ISA rules we discussed earlier.

Business Asset Disposal Relief (BADR)

You may be eligible to pay less Capital Gains Tax when you sell or ‘dispose’ of all or part of your business. Previously known as Entrepreneur’s Relief prior to 6^th April 2020, Business Asset Disposal Relief means you’ll pay tax at 10% on all gains from any qualifying assets.

In order to benefit from BADR when you sell any shares you must meet the following criteria for a minimum of 2 years prior to the date you sell your shares.

• You’re an employee or office holder of the company
• The company’s main activities are are trading (as opposed to investing) or it is the holding company of a trading group.

You must also be aware of the rules regarding whether or not the shares you are trying to sell are from an Enterprise Management Incentive (EMI). If shares are from an EMI you must have matched the follwing criteria:

• You purchased the shares after 5^th April 2013
• You were given the option to buy the shares atleast 2 years before selling them

Capital Gains tax is something that investors need to be aware of. Whilst everyone has an annual allowance, if this is going to be exceeded, you need to ensure you are prepared for the bill or know what other avenues are available. To discuss how CGT can affect you and your investments, speak to a member of the Wright Vigar team.