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Q. In the last full tax year 2016-2017, my wife sold some shares which I had been awarded through work option grants over a number of years in the early 2000s. We obviously made a capital gain between the grant price and the selling price.
My wife does not work and therefore has no other income to declare and has not been submitting a self-assessment form or paying PAYE. We sold roughly half our holding.
Do we just submit the self-assessment form with only the capital gains element completed? And given the shares were awarded over 5-7 years at different grant prices, how do I calculate the gain accurately for HMRC?
Submitted via Which? Money Magazine
A: Whether you’ll need to declare a capital gain, or pay tax on your profits will depend on the value of your shares.
We’ll explain how CGT works, as well as how to calculate your tax bill and submit your return to HMRC.
How much is capital gains tax?
Capital gains tax (CGT) is charged on the profit you make when selling assets. As the name suggests, you only pay it on your gains when selling something, rather than on the total sales price.
The CGT rate is 10% for basic rate taxpayers, and 20% for higher- or additional-rate taxpayers, on most assets.
The only exception is on property, where you’ll pay 18% as a basic-rate taxpayer or 28% as a higher-rate taxpayer. You don’t need to pay capital gains tax when selling your main home, but you will when selling a rental property or second home.
Bear in mind that your capital gain might push you into a higher tax bracket. If your combined income and taxable capital gains for the year are more than the higher-rate threshold (£43,000 in 2016-17), you’ll need to pay 20% on the excess.
- Find out more: Capital gains tax allowances and rates
Capital gains allowances
Everyone can make a certain amount of capital gains each year before tax is due. In 2017-18, your first £11,300 gains will be tax free (£11,100 for 2016-17 and £11,700 for 2018-19).
You can also offset losses against your CGT bill. If you sold two properties – making a £50,000 profit on the first, but a £25,000 loss on the second – then your overall gain would only be £25,000.
If you make a loss when selling an asset but haven’t made enough gains to owe CGT in the current tax year, you can carry forward your loss, and write it off against your CGT bill in future.
Working out capital gains on shares
With most assets, working out how much you owe is relatively straightforward.
But given your wife bought her shares at different time, presumably at different prices, and she will only be selling part of her investment, working out what you paid for the shares is slightly more complicated.
HMRC has rules that explain the order you should sell off the shares you bought. Before looking at your historic holdings, you’ll need to deduct any shares you bought on the same day as your disposal. Then you need to account for any shares you bought in the 30 days after your disposal.
Once you’ve done that, you work out how much you paid for your other shares (known as your Section 104 holding) on a pro rata basis. Add together all the money you spent on the shares. Then work out what proportion of shares you are selling, to work out your cost. Then divide that cost by the proportion of shares you are selling.
Example of CGT on shares
Let’s say you bought 1,000 shares at 50p on 1 January 2010, then another 1,000 shares at £1 on 1 January 2011, and then finally another 1,000 shares at £1.50 on January 2012. Overall, you would have bought 3,000 shares for £3,000.
That works out as an average of £1 each. If you sell 1,000 shares for £5 each this year, your gain would be £4,000 (1,000 x the £5 sale price, less the average £1 purchase price).
This can be more complicated still if you’ve received shares as part of a share issue, received free shares or have already disposed of shares. HMRC has published detailed guidance on its website in a document called HS284.
You can also deduct expenses from your gain. With shares, these include any stockbroker fees you paid when buying and selling, as well as the stamp duty you paid when buying the shares.
- Find out more: Capital gains tax on shares
Paying your capital gains tax
You’ll need to submit a self-assessment return if you owe any tax (that’s if your gain is worth more than the annual allowance, which is £11,300 in 2017-18), or if the shares you sold are worth more than four times your annual allowance (£45,200 for 2017-18).
You should also submit a tax return if you’ve made a loss when selling assets, which you’d like to claim against a future capital gains tax bill.
You can’t just submit the capital gains section. But your wife should find her tax return relatively straightforward if she has no other income to declare. It’s a good idea to write a brief explanatory note as to why this is, otherwise HMRC may be more inclined to investigate your affairs.
- Use the Which? Tax Calculator to submit your return online direct to HMRC
How to avoid capital gains tax on shares
If you hold shares inside an Isa or pension you won’t need to pay capital gains tax when selling them.
You can put up to £20,000 into an Isa each year. So if you have substantial holdings it makes sense to transfer some of them into your Isa, so you won’t owe pay tax on them in future.
- Find out more: What is a stocks and shares Isa?