Do I need to pay capital gains tax on shares?
Unless held in a pension or Isa, you'll generally need to consider capital gains tax when selling shares, funds, investment trusts or other financial products for a profit.
Here's how investments are taxed, and how to arrange your investments so you don't end up paying more tax than you need to.
- Get a headstart on your 2019-20 tax return with the Which? tax calculator - tot up your bill and submit directly to HMRC.
CGT rates on investments
The rate of capital gains tax you pay depends on your income tax band.
Basic-rate taxpayers pay 10% capital gains tax. Higher and additional-rate taxpayers pay 20% capital gains tax.
In the 2020-21 tax year, you can make £12,300 in capital gains before you have to pay any tax - and couples can pool their allowance. In 2019-20, you were be able to make £12,000 gains before tax.
- Find out more: tax-free income and allowances
How do I calculate my CGT bill?
Special rules apply to shares and unit trusts.
There is no capital gains tax payable on shares or units held in an Isa or pension. For all other shares, you'll pay capital gains tax on any profits from a sale.
If you acquire identical shares or units at different times, HMRC assumes you dispose of them in a strict order.
In this case, you need to know which shares or units you are selling so that you can work out any tax bill using the correct initial value.
To solve this problem, the tax rules say you must match the shares or units you are selling to the ones you bought in this order:
- shares or units you buy on the same day
- shares or units you buy within the next 30 days
- the rest of your shares or units – these are treated as being held in a pool and acquired at their average price.
You can get an HMRC help sheet, called 'HS284 Shares and capital gains tax' from the HMRC website.
Save tax with a Bed and Isa
The easiest way to sidestep paying capital gains tax on your investments is to make sure they are in an Isa, where any investment growth will be free from CGT, and any income, such as interest or dividends will be free from income tax.
You're allowed to save or invest up to £20,000 in an Isa each year.
If you already hold investments, you can't transfer them into your Isa. Instead you can opt to sell them, transfer the money to your Isa, and use that cash to buy the investments back - a pair of deals known as a a Bed and Isa.
Bear in mind there can be charges involved with buying and selling, and you'll generally have to pay slightly more to buy an asset than you'll get when selling it. There's also a chance that the price will go up between your selling and buying it back, which could cost you. But if the price falls that could work to your advantage.
However, many investment platforms have processes that can simplify, speed up, or reduce the cost of a Bed and Isa, so speak to your provider before you begin the process.
Find out more: what is a stocks and shares Isa?
CGT on employee shares
You may get shares in the company you work for through an employee scheme at work.
Depending on the scheme, there could be a capital gains tax bill if you sell immediately and, with all schemes, there could be a future bill if you keep the shares and sell later:
Share-incentive plan (SIP)
You are awarded or buy shares that are held in the plan for you. There is no CGT while the shares are in the plan, nor when the shares are eventually transferred to you.
At the time of transfer, you are treated as acquiring the shares at their market value, and this forms the basis of calculating any taxable gain or loss when you dispose of the shares – so if you sell immediately, there shouldn't be any CGT to pay.
You save monthly to build up savings that earn a tax-free bonus over a period of three, five or seven years. At the end of that time, you can either withdraw your savings as cash or use them to buy shares in your employer’s company at a price set at the time the plan started.
When you sell the shares, you may have a taxable gain or loss and generally this is based on the sale price less the price at which you acquired the shares under the option.
Company share-option scheme (CSOP)
You are given the option to buy shares in the company at a set future date at a set price (which can't be less than the market value of the shares on the date the option is granted).
Assuming you take up the option, when you sell the shares, you may make a taxable gain or loss, and generally this is based on the sale price, less the price at which you acquired the shares under the option less anything you paid for the option itself.
Enterprise-management incentive (EMI)
You are given the option to buy shares in the company at a set future date at a set price. If the set price is less than the market value of the shares on the date the option is granted, this perk counts as part of your pay on which you have to pay income tax.
Assuming you take up the option, when you sell the shares, you may make a taxable gain or loss, and this is based on the sale price less the price at which you acquired the shares under the option, less anything you paid for the option itself less any amount on which you paid income tax when the option was granted.
When you get employee shares from a SIP or SAYE plan, any increase in value is ignored if you transfer them within 90 days to an Isa or a personal pension.
Because Isas and personal pensions are CGT-free, this means there is no capital gains tax when you eventually sell the shares (but no relief for losses either).
For more information about employee shares schemes, see the notes to the Additional information supplement available from HMRC website.