Capital Gains Tax - Shares and Securities

Published on:

January 27, 2011

Capital Gains Tax (CGT) has grown progressively more complex over the years -- a victim of politicians' inability to leave things be. As a result, the number of manifestations of this tax over time has led to a situation in which the calculation of a taxable gain in some cases is barely comprehensible.

It might be helpful to start with exemptions. That is, situations and types of security that are not liable to CGT. Here is a list of some common areas:

  • Government securities
  • Qualifying corporate bonds - broadly, interest-based corporate loan stocks, excluding convertibles
  • Venture capital trusts - subject to conditions
  • Enterprise investment schemes - subject to conditions
  • Gifts to charity
  • ISAs, i.e. whatever securities are held within them
  • Transfers between spouses. This is not restricted to shares and applies to any asset so transferred

Apart from these, the disposal of shares and other securities will in general give rise to a potential capital gains tax liability, or an allowable loss. Note that disposal does not necessarily mean a market sale. Gifting the shares in general to any person other than a spouse is deemed to be a disposal at market value, whatever the amount of money changing hands.

Every person, including minors, is exempt from CGT on the first slice of their net gains in any tax year - up to a figure called the 'personal exemption'. Currently this is roughly £10,000 a year. That is not only on shares but gains on all chargeable assets. Net gains means profits minus losses, after deducting all other reliefs that may be available, including losses brought forward from previous years. Following on from that, net losses in a year can be carried forward indefinitely and will be set against gains as they arise in future. The personal exemption is given for each tax year alone, and cannot be carried forward.

Disposals of shares where new securities are received in exchange for the shares are not treated as disposals for CGT purposes. This happens often in takeovers and company reorganisations. In such a case you are deemed to hold the new paper at the original cost of the old paper. No CGT disposal occurs until you sell the new shares for cash. If all cash is received in the deal, though, this is like any other sale for CGT purposes. If, as sometimes happens, it is a mixed cash and paper deal then there may be a partial CGT disposal or, if the cash element is small, then it is not treated as a sale but as a reduction of cost.

Rates of CGT

Broadly speaking capital gains are taxed at 18%, unless you are a higher-rate taxpayer, in which case they are now taxed at 28%. What rate you pay depends on your total taxable income.

Please see the HMRC website for more information on shares and CGT.

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