How to calculate capital gain tax on shares in the UK?

When an asset is sold or disposed of, capital gains tax (CGT) is due on the money received as a result of the sale (also known as profit tax). In order to arrive at the final profit, we need to deduct the original purchase price from the sale price we received. To determine the Capital Gains Tax due, the appropriate rate is applied after all tax relief, and tax-free allowances have been taken into account.

Capital gain tax in the UK

Capital gain taxes in the UK are imposed on the sale of non-inventory assets, such as stocks, bonds, and mutual funds, by individuals and trusts in Britain. People who own businesses and invest in them are the primary target group of the capital gains tax because the most common capital gains are realized from the sale of bonds, shares, precious metals, real estate, and property.

What is Capital Gain Tax (CGT)?

CGT is a tax that is levied on the profit you make when you sell an asset. For an asset held for more than a year, the gain is calculated by comparing the sale price to the purchase price.

Typically, it’s used in the following situations:

• Shares
• Investment funds
• Second-hand properties
• Inherited properties
• Transfer of a company
• Art, jewellery, and antiques
• Assets that have been sold for less than their actual value

Taxes on capital gains on these assets currently differ from income tax rates. Purchases of such assets are seen as a risk, whether entrepreneurial or investment, and so the additional burden of risk brings a greater potential reward.

Current Capital gain tax rates and allowance In UK

CGT Rates and Allowances

• Basic Rate: 10% for shares, other assets, and cryptocurrency.
• Higher Rate: 20% for shares, other assets, and cryptocurrency.
• Residential Property: 18% for basic rate and 24% for higher rate.
• Annual Exempt Amount: £3,000 for individuals and £3,000 for trusts.

CGT on Specific Assets

• Shares: CGT applies unless they are in an ISA or PEP. The rate depends on income and gains from all sources.
• Residential Property: CGT applies unless it is the main home, in which case there is no CGT. For non-main homes, CGT rates are 18% and 24%.
• Cryptocurrency: CGT applies at 10% and 20% rates.
• Business Assets: CGT applies, but reliefs such as Business Asset Disposal Relief (BADR) and Entrepreneurs’ Relief are available. It is 10% in the case of a sole trader or partnership, and the gains qualify for BADR.

Source: Gov.UK

When Should You Pay your Capital Gain Tax in the UK?

To be taxed, you must have earned a certain sum of profit from your items. Based on your tax bracket and capital gain tax allowance, you may be able to deduct a portion of this amount.

The following are examples of investments that may require capital gains tax:

• Buy-to-let or second residence
• In the absence of an Isa or pension fund,
• Sale of a company
• Valuable items if sold for more than £6,000

If you just declare your gain and apply the appropriate rate, you’ll be fine with CGT. A CGT allowance of £12,300 is available for the first year of the tax year. Before CGT is applied, this is the profit you can make. If you make less than this amount in the tax year, you will not be subject to CGT. However, if you don’t use the allowance when selling your assets, you can’t carry it over to the next year.

How Does Capital Gain Tax Work?

Whenever your gains exceed the annual allowance, apply the appropriate rate to the gains you have made on the assets. For joint ownership of an asset, such as in a marriage, you can apply your allowances to both of you. As a result, the amount you can earn before paying capital gains tax on the sale of a second home doubles to £24,600.

This should be done only after consulting with a professional, as other forms of compensation may be available.

Where CGT does not apply

Exemptions from capital gains tax apply to gains on the sale of specific types of assets. For example, you do not have to pay capital gains tax on:

• Betting
• Prize Bonds
• Wins in the lottery
• Sweepstakes
• National Instalments Savings Scheme
• Government stocks
• Some types of life insurance policies
• Movable property (such as furniture)
• Animals
• Private Automobiles

Relief from capital gains tax may be possible. Spouses or civil partners, as well as individuals, are given specific exemptions.

Calculation of Capital Gain tax on Shares

Depending on your tax bracket, you may be subject to a 10% or 20% capital gains tax on stock sale. Here’s an explanation of how to figure out your final bill.

Things you need to know before calculating tax

Before calculating the capital gain tax rate for shares in the UK, make sure the following terms are taken care of:

The market value of shares

When calculating your profit, you may want to use the current share price as a starting point. Take action if:

• Someone other than your spouse, civil partner, or charity received them as a gift from you.
• You got rid of them for a loss.
• Your family members have passed away, and you don’t know how much they’ll owe in taxes.
• Before April of 1982, you were the owner.
• You got them as part of an employee stock purchase plan

In order to calculate your profit, use the price that the shares were sold or given to you for by someone who claimed Gift Hold-Over Relief. Regardless of how much you paid, use the amount you paid.

Circumstances of selling shares

To figure out how much you’ll get for your stock if you decide to sell it, there are a few special rules:

• Shares in the same company that you purchased at various prices and at different times
• Through an investment club, you can buy stock.
• Shares after a takeover or merger of a company
• Employee stock ownership plans (ESOPs)

Deduct costs and add reliefs

Certain costs associated with purchasing or selling your stock can be deducted from your profit. These are some examples:

• Fees, such as those charged by stockbrokers.
• When you purchased the stock, you had to pay the Stamp Duty Reserve Tax (SDRT).
• It is possible to reduce or postpone paying capital gains tax if you are eligible for tax relief.

Use CGT calculator to calculate tax

To determine if you are required to report and pay capital gains tax, you must first know your gain. In order to use the capital gain tax rate calculator, you must have sold shares that were:

• The same type, purchased at the same time by the same company
• Concurrently sold

How to calculate Capital Gain Tax on shares

Each sale or gift of chargeable shares in a given tax year must be evaluated separately. You must perform the following calculation for each disposal:

Shares can be sold for a profit if the difference between the net proceeds and the allowable expenditure is greater than zero.

Loss relief must be used if the difference between the two amounts is negative.

Formula and Example

Let’s take an example to understand how to calculate Capital Gain Tax on Shares. Suppose Ken bought 1000 shares in Blink Corp. at £3 per share, for a total cost of £3000. He later sold all 1000 shares for £10 per share, for a total sale price of £10,000. Now, let’s break down the calculation:

Now, consider his total annual income, which is £60,000. Capital gains will be taxed at 20% if this exceeds the higher rate threshold.

To calculate the capital gains tax:

In this example, the capital gain on the sale of shares is £7000. After deducting the annual exempt amount, the taxable gain is £4000. The resulting capital gains tax due is £800.

How does Capital Gain Tax work on employees’ shares?

Some companies offer their employees the opportunity to gain ownership of the company in which they work. A capital gains tax bill is possible depending on the scheme, and it is possible with all schemes if you hold on to your shares and sell them at some point in the future. The following are the primary employee stock options that your company may provide:

Share incentive plan

Shares that have been designated for you in a retirement plan can be awarded, purchased, or both. While the shares are in the plan or when they are eventually transferred to you, there is no CGT to be paid on the value of those shares.

Transferred shares are valued at market value at the time of transfer, and this is used to calculate any taxable gain or loss when the shares are later sold. This means that if you sell right away, you won’t have to pay any capital gains tax (CGT).

Save-as-you-earn

This option allows you to save each month from accumulating tax-free savings over a three, five, or seven-year period. Your savings can either be withdrawn as cash or used to purchase shares of your employer’s company at a predetermined price at the beginning of the plan. A taxable gain or loss may be realized when you sell the shares. Typically, this is calculated by subtracting the sale price from the price you paid for the stock.

Company share option scheme

You are given the option to purchase shares of the company in which you work at a predetermined future date at a predetermined price; this price cannot be less than the market value of the shares at the time the option is given.

If you decide to exercise the option, you may or may not have a taxable gain or loss when you sell your shares. For the most part, this is calculated by subtracting the sale price from the option’s purchase price, minus any fees you paid for the option itself.

Enterprise management incentive

You have the option of purchasing shares in the company at a predetermined price in the future. Your income tax bill will be higher if you receive an option to purchase stock at a lower price than its market value at the time you receive it.

If you accept the option, you may be subject to a taxable gain or loss when you decide to sell your stock. When calculating this, you’ll subtract the price you paid to exercise the option, the price you paid to acquire the shares and any income tax you may have paid on the option’s grant.

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