As the tax deadline looms, it’s time to worry about capital gains tax on shares again. Capital gains tax (CGT) falls due on investments you sell for a profit in any given tax year, unless:
- The asset is sheltered in your ISAs or pensions.
- Your gains are covered by your annual capital gains tax allowance.
- Your gains can be offset by your trading losses on other shares and assets. See our guide to defusing your capital gains below.
- The asset is exempt from capital gains tax.
CGT on shares and other assets is payable on your profits i.e. the difference between your buy price and sell price, after costs.
For example, if you buy a share for £100 and sell it for £1,100 ten years later, then your gain equals £1,000.
CGT is payable on your total taxable gains in a tax year. All capital gains and losses are pooled together for HMRC purposes.
If you fall into the ‘liable for tax’ net then you’ll pay CGT on the gains you’ve made above your tax-free allowance.
However, there are plenty of strategies you can legitimately use to reduce or eliminate capital gains tax on shares.
How much capital gains tax on shares?
The capital gains tax rate on shares and other investments is:
- 10% for basic rate taxpayers.
- 20% for higher rate taxpayers and additional rate taxpayers.
Other investments are taxed at the same rate except for second-homes and buy-to-let properties. The CGT rate for property is:
- 18% for basic rate taxpayers.
- 28% for higher rate taxpayers and additional rate taxpayers.
The rate you pay normally depends on your total taxable income, and what sort of assets you’ve made a profit on.
Beware basic rate taxpayers can pay CGT at the higher rate, if your gains nudge you up a tax band. You can work it out like this:
- Subtract your annual CGT allowance from your total taxable capital gains.
- Add your total taxable income (include salary, dividends, savings interest, pensions income etc, minus income tax allowances and reliefs).
- Pay the higher CGT rate on any profit that falls within the higher-rate income band.
N.B. Scottish taxpayers pay CGT at UK rates. A higher-rate Scottish taxpayer can therefore pay capital gains tax at the UK basic taxpayer level.
You need to report your taxable gains via your self-assessment tax return.
Do this if your total taxable gain in the tax year exceeds your annual capital gains tax allowance…
…if your sales of taxable assets are over four times the annual CGT allowance.
For example, if you sold £70,000 in shares, you’d report the gain, because the amount sold is higher than four times the CGT allowance of £12,300.
Remember that sales of assets in ISAs and SIPPs aren’t reported, and so don’t count in your sums at all.
Offshore funds pay even higher CGT rates
Capital gains on offshore funds are taxed at higher income tax rates rather than CGT rates if they:
- Do not have UK reporting fund status.
- Aren’t protected by an ISA or SIPP.
Check that the offshore funds you own (i.e. any not domiciled in the UK) have UK reporting fund status. This should be indicated on the fund’s website. HMRC also keep a list of reporting funds here.
The kicker is that you can’t cover non-reporting fund gains with your CGT allowance either.
Capital gains allowance on shares
The annual capital gains tax allowance (or Annual Exempt Amount) for your total profits is:
£12,300 from 6 April 2020 to 5 April 2021.
You can find UK Government updates on CGT here.
Capital gains tax exemptions
Some investments and other assets are exempt from capital gains tax:
- Your main home (in most cases).
- Individual UK Government bonds (not bond funds).
- Cash which forms part of your income for income tax purposes.
- NS&I Fixed Interest and Index-Linked Savings Certificates.
- Child Trust Funds.
- Premium bonds.
- Lottery or betting winnings.
- Anything held in an ISA or SIPP.
Capital gains tax is payable on shares, ETFs, funds, corporate bonds, bitcoin (and other cryptocurrencies), and personal possessions worth over £6,000, including some collectibles and antiques.
Avoiding capital gains tax on shares
You can reduce your tax bill by offsetting trading losses against your capital gains. This is known as tax loss harvesting and is a legitimate way to avoid capital gains tax on shares.
Terminology note – tax avoidance means legally reducing your tax bill such that HMRC won’t raise an eyebrow. Tax evasion is owning shell companies like some people own shell suits, and funnelling cash to places with superyacht congestion problems.
Tax loss harvesting means selling shares and other assets for less than you originally paid for them.
You strategically sell assets to realise losses you are already carrying in your portfolio, thus minimising your capital gains. You don’t try to create losses with bad investments, which is where people can get confused!
The goal is to reduce your gains to within your CGT allowance for the year.
We’ve come up with a quick step-by-step guide to help you do this:
1. Calculate your total capital gains so far
Tot up the gains, if any, you’ve made from selling shares, funds, and other chargeable assets this tax year (starting last April 6th).
Your records (or your platform’s statements) are worth their weight at moments like this.
You need to include every sale you made over the tax year, regardless of what you did with the money afterward.
- You make a capital gain on any share holding or fund (outside of ISAs or SIPPs) that you sold for more than you paid for it.
- Work out each capital gain by subtracting the purchase value and any costs (such as trading fees) from the sale proceeds.
- Add up all these capital gains to work out your total capital gain for the year.
Remember that shares and funds are not the only chargeable assets for CGT. You need to add all such capital gains into your total for the year. They all count towards your annual CGT allowance.
For example, any property – other than your main home – is potentially liable for CGT when you sell it. See HMRC’s property guidance here.
2. Calculate your losses
You register a capital loss if you sold shares, other investments, or a dodgy buy-to-let flat for less than you originally paid for it.
- Add up all your losses over the year.
- Grit your teeth, fling your hands over your eyes, peek at your grand poo-bah loss.
- Remember it’ll be OK because you’ll harvest the loss to neutralise your gains.
- Sales of CGT-exempt assets don’t count towards capital losses. So you can’t count disaster-trades contained within ISAs and SIPPs for example.
Now for the good bit – offsetting your losses against your gains.
For instance, if you made £15,000 in capital gains on shares over the year, and you made capital losses of £6,000, then your total gain is £9,000.
Your losses have trimmed your gains to within your annual CGT allowance – no capital gains taxes for you this year.
You can also offset unused capital losses you made in previous years, provided you notified HMRC of your loss via earlier tax returns. (Best do so in the future).
3. Consider selling more assets to use up more of your CGT allowance and defuse future gains
You now know what your total capital gains for the year are (from step 1), after subtracting any capital losses (step 2).
If your total gains are higher than your CGT allowance – then you’ll pay CGT on the gains above the allowance.
But before the tax year ends, consider selling an asset you’re currently carrying at a loss in order to offset that loss against your gains. This will further reduce or eliminate your capital gains tax bill.
If your total gains are less than your CGT allowance – then you won’t have to pay any capital gains tax on those gains.
Before the tax year ends, consider selling other assets you’re carrying that are showing a capital gain. This enables you to use more of your CGT allowance for the year – without going over the allowance, of course.
Like this, you defuse some of the capital gains you’re carrying, which may help you avoid breaching your CGT allowance in future years.
If you’ve made an overall loss in a tax year – after subtracting losses from gains, then you should declare it on your self-assessment tax return.
Capital losses that you declare and carry forward like this can be used to reduce your capital gains in future years, when you might otherwise be liable for tax.
Losses can be a valuable asset, but only if you tell HMRC.
4. Reinvest any proceeds from sales
If you made any sales in step 3 to improve your capital gains position, then it’s time to reinvest the cash you raised. These are the key techniques:
Bed and ISA / Bed and SIPP – Ideally you’ll tax-shelter the money within a stocks and shares ISA or SIPP – putting that money beyond the reach of capital gains tax.
You can purchase exactly the same assets in your tax shelters immediately.
New asset – If your tax shelters are full, and you don’t want to earmark the money for next year’s ISA/SIPP, then you can reinvest in a different holding as soon as you’ve completed your sale.
This new investment starts with a clean slate for CGT purposes.
Beware the 30-day rule – You need to wait 30 days to reinvest in exactly the same share, ETF or fund outside of your tax shelters.
If you flout the 30-day rule, then the holding is treated as if you never sold it – undoing your tax loss harvesting work.
Same but different – You can sidestep the 30-day rule by purchasing a similar fund (or even share) that does the same job in your portfolio. For example the performance gap between the best global index funds is usually small.
You can buy a lookey-likey fund straightaway, defuse your gain, and keep your strategy on course.
Bed and spouse – This is the ever-romantic finance industry’s term for keeping the asset in the family. You sell the asset and encourage your spouse or civil partner to purchase it in their own account.
Your gain is defused and your significant other starts afresh with the same asset, which maximises the two CGT allowances available to your household.
Tax on selling shares
The cost of trading is like a tax on selling shares, and it’s the can’t ignore factor that means selling for tax purposes isn’t always a good idea.
Trading costs include dealing fees, any stamp duty you pay on reinvesting the money, and also the bid-offer spread on the churn of your holdings.
Trading costs can significantly damage the benefit of defusing gains –especially on small sums – and even more so if you pay CGT at the basic taxpayer’s rate.
So it’s best to realise capital gains as part of your rebalancing strategy, when you’re already spending money to reduce your holdings in outperforming assets while adding to the laggards.
Deferring capital gains tax
You can defer capital gains tax on your shares and other assets by never selling! No sale, no gain, no capital gains tax.
This is especially relevant if you’re an income investor who hopes to live off their dividends for the rest of their life.
In this case, you simply enjoy the dividend income from your shares and let the capital gain swell.
The risk is you could be forced to sell.
Unforeseen emergencies are one problem, but routine events such as company takeovers, fund closures or mergers can also count as disposals for CGT purposes. Then you’ll be hit with a big tax charge on the gains.
Capital gains tax on inherited shares
Capital gains tax is not payable on the unrealised gains of shares belonging to someone who dies. Inheritance tax may be due on the value of the shares, but not CGT.
Any gain you make between the date of the person’s death and your disposal (of the shares, not the body) does count for capital gains tax purposes. That’s assuming you couldn’t tuck the assets in a tax shelter etc.
Capital gains on shares help
HMRC guidance on calculating capital gains tax on shares can be found here.
It is also tax article law to include a warning about ‘not letting the tax tail wag the investment portfolio dog.’
There is definitely a fine line to tread between avoiding a higher capital gains tax bill and becoming dangerously obsessed. In practice, most of us can do a fair bit of selling to defuse CGT – without derailing our strategy – by repurchasing the assets within an ISA or SIPP.
Think of it partly as an insurance policy. You may as well use the allowances you’ve got now, in case you’ve got more money and more capital gains on shares in the future, but not more allowances.
It’s a case of use it or lose it.