Holding shares is generally more tax efficient through an ISA or pension – but if you want to switch equities already owned into a tax wrapper, how is the tax worked out?
Investors who hold shares as individuals must consider capital gains tax (CGT) when they dispose of them.
Disposal can involve selling to a third party, switching ownership with a spouse or moving the shares into an ISA or pension.
CGT is paid on the gain – the difference between the selling price and the buying price.
Transferring shares to a spouse is tax-free if they are gifted unless they are separated and live apart in the tax year when the gift is made or the shares were given to their business to sell.
Tax-free share disposals
It’s also important to know other share trades that are free of CGT. They include:
- Shares already in a PEP, ISA or pension
- Shares in an employer Share Incentive Plan (SIP)
- UK government bonds and premium bonds
- Qualifying corporate bonds
- Some employee shareholder shares
Working out the selling price is easy regardless of if money or money’s worth was paid by the buyer – the market value of the shares on the day of sell is used.
This is generally on the sales note. Most accountants have historic databases of share prices for tax returns that they can refer to.
Working out the gain
The problem comes when looking up the purchase price if a portfolio of shares was bought at different times.
The best way to do this is to split the portfolio into three:
- Any shares bought in the past 24 hours
- Any shares bought between in the month before yesterday
- Shares bought at any other time multiplied by the average purchase price
Add these three totals together to give the purchaser cost of the shares that were sold.
Deduct the total from the selling price to leave the gross gain.
Deduct any stamp duty or stockbroker’s fees paid to leave the net gain.
CGT for 2017-18 allows an annual exempt amount of £11,300. Tax is applied at 18% or 28% on gains above that amount.
