“How can I save tax when I sell shares?” asks David in a recent email.
Online investing platforms give individuals the ability to buy and sell shares at the click of a button. In days gone by, you needed a stockbroker to do this for you, but investing is much easier these days. Let’s first examine the basic rules of how any profits are taxed when you sell shares.
What is Capital Gains Tax ?
Capital Gains Tax (CGT) is a UK tax charged on the profits (known as gains) on the sale of personal assets such as shares, 2nd homes, antiques and works of art. It is normally charged at a simple flat rate of 20% when you sell shares. If you only pay basic rate tax (your total income is less than £50k) and make a small capital gain you may only be subject to a reduced rate of 10%. Once the total of your taxable income and gains exceeds the higher rate threshold, the excess will be subject to 20% CGT.
How can I save Tax when I sell Shares?
Here are five ways to save tax when you sell shares. Note that this isn’t direct tax advice, and you should always speak to a professional advisor before making decisions about share investments and sales!
(1) Invest in shares through an ISA
A Stocks and Shares ISA is an account that lets you invest in individual shares or a range of managed funds. The experts call this a ‘tax wrapper’. If you make a profit on shares, these free from capital gains. And you don’t pay income tax on any share dividends paid out from the companies you have invested in. You can invest up to £20,000 into an ISA. But remember – the value of shares can go down as well as up. You may not get back what you’ve put in. So consider using a cash ISA as well.
(2) Use your annual CGT exemption.
In the current 2020/21 tax year you can make £12,300 of gains before paying any CGT. The allowance applies to each member of a married couple or civil partnership. The £12,300 is a “use it or lose it” tax allowance. You can’t carry it forward to future tax years.
(3) Get Married
A married couple can potentially realise gains of £24,600 this tax year without incurring any tax liability. In some circumstances, you can also transfer assets between spouses and civil partners tax-free. Have a think about transferring shareholdings to a spouse in a lower tax bracket. Or one who hasn’t used their annual CGT allowance
(4) Delay selling your shares by one day
The usual due date for paying CGT you owe to HMRC on the sale of shares is the 31 January following the end of the tax year in which a capital gain was made. This means that CGT for any gains crystalised before 6 April 2021 will be due for payment on or before 31 January 2021. However, if you waited until the start of the next tax year you would have until 31 January 2022 to pay any CGT due. For example, you could benefit from this extra year to pay CGT due by waiting to crystallise a gain from the 5 April 2021 (2020-21 tax year) until the 6 April 2022 (2021-22 tax year).
(5) Don’t Pay Tax Twice
Another thing to bear in mind is that capital gains are wiped out when you die. So your estate will pay inheritance tax rather than CGT on the profit you’ve made on those shares. If you sell shares in later life and incur CGT, the cash you’ve realised will also be subject to IHT. So selling later in life can effectively mean you pay tax on the same asset twice.
The normal way to report a gain on the sale of shares is to complete the relevant sections of your Self-Assessment tax return. When calculating your gain, you can deduct certain costs of buying or selling shares such as stockbrokers’ fees or Stamp Duty Reserve Tax.