Although once you sell shares you have what are called 'disposal proceeds'. Subtracting the purchase cost of the shares you end up with what most investors would describe as their profit.
Although many accountants would have you believe otherwise, the basic capital gains tax calculation is pretty straightforward.
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Although however, this is not the amount that gets taxed. From your profit you can deduct certain expenses, such as stamp duty and stockbroker's fees
Note, however, that if you owned the shares before April 1998 you can also deduct indexation relief and if you've held the shares for more than three years you can also deduct taper relief. What's left is described as the chargeable gain.
Although from this you can deduct your annual capital gains tax exemption. Whatever's left gets added to your other income and taxed at your marginal rate: either 10%, 20% or 40% depending on the size of the gain and how much other income you ear.n
Although a typical capital gains tax calculation is summarised in the table on the next page. If you bought the shares after April 1998 you can ignore the indexation allowance and if you've held the shares for less than three years you can usually ignore taper relief. In these cases the tax calculation is usually extremely simple.
| Typical CGT Calculation | ||||
| Proceeds | X | |||
| Less | ||||
| Acquisition cost | (X) | |||
| Deductible expenses | (X) | |||
| Indexation allowance | X | |||
| Taper relief | (X) | |||
| Chargeable gain | X | |||
| Less: | ||||
| Annual exemption | (X) | |||
| Taxable gain | X | |||
Aaron sells shares for £15,000 in December 2004. He bought them for £5,000 in December 2002. His profit is therefore £10,000. From this we subtract deductible expenditure of, say, £75 (representing stamp duty and broker.s commission). He does not qualify for indexation relief because the shares were bought after 1998 and he does not qualify for taper relief because the shares have been held for less than three years. He does, however, qualify for the annual CGT exemption of £8,200 and deducting this leaves a taxable gain of £1,725. If he's a basic rate taxpayer this will be taxed at 20%, if he.s a higher rate taxpayer this will be taxed at 40%.
Of course, matters aren't always this simple. Every step of the typical CGT calculation outlined above has a variety of 'ifs', 'buts' and 'maybes'...
Although however, before we go on to examine the capital gains tax calculation in detail it's worth pointing out that CGT is often not as onerous as most investors expect. Thanks to the many reliefs on offer you are likely to end up paying far less than the 40% rate that most investors bandy about, even if you are a higher rate tax payer.
Although thanks to taper relief (which protects as much as 75% of your profits from the taxman) and the annual CGT exemption (which protects a further £8,200 per person), your 'effective tax rate'. will usually be much lower than 40%.
Although by effective tax rate, we mean the total tax expressed as a percentage of your profits.
Although you may be a 40% taxpayer but thanks to the various deductions allowed you will only pay 40% on the .chargeable gain.. The chargeable gain is often much lower than the actual profit.
Although for example, in the tables below we illustrate some effective tax rates of higher rate taxpayers on different levels of profit. The first table is for married couples (who enjoy two CGT reliefs), the second table is for unmarried investors. These figures are calculated after taking account of the annual CGT exemptions and non-business asset taper relief.
Although the tables make fascinating reading because they show that even if you are a higher rate taxpayer and earn tens of thousands of pounds in investment profit, you may end up paying as little as 0-25% tax, without resorting to any fancy tax planning.
Although even if you earn profits of £200,000 you could end up paying no more than 20% tax!
Although remember the tables are for 40% taxpayers. If these investors were able to sell their shares in years of low income or transfer a greater proportion to a low income spouse the tax savings would be even greater.
Some of the chargeable gain would be taxed at just 20% or even 10%.
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Although it's also important to point out that not all assets fall into the capital gains tax net.
Although the table below lists some of the more popular types of investment, along with their capital gains tax treatment.
| Subject to CGT? | ||||
| UK shares | Yes | |||
| Overseas shares | Yes | |||
| Unit trusts | Yes | |||
| Venture capital trusts | No | |||
| Hedge funds | No | |||
| Gilts | No | |||
| Corporate bonds | Usually No | |||
| Warrants/options | Yes | |||
| Futures | Yes | |||
| Gold Coins | Yes | |||
| Spread betting | No | |||
Venture capital trust profits and spread betting profits are completely tax free, as are capital gains from gilts and most corporate bonds. Hedge fund profits are usually subject to income tax.
Although most investors are subject to capital gains tax when they sell shares or other assets. However, if the taxman classes you as a trader you will instead pay income tax on your profits.
Although you also have to be UK resident and UK 'ordinarily resident' To pay UK capital gains tax.
Share trader status is not easy to acquire (and often not very desirable!) and becoming non resident does not appeal to the vast majority of investors (especially if it's done for tax reasons only!) so the vast majority of those buying and selling shares will pay capital gains tax on their investment profits.
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