During periods when savings account interest rates are low there is often a rise in individuals who invest in the stock market, therefore knowing the rules on the taxation on shares is important. This article will cover some aspects of the taxation on shares for those who are resident in the UK:
- ISA and Non-ISA
- How to determine your Capital Gains Tax Rate *
- Dividends (incl. SCRIP, DRIP and REIT)
- What if you do not receive cash?
- I pay tax on my dividends
- Losses on share trading *
- Tax and Loss issues *
- How Capital Gains and loss are calculated on share trading *
- What costs can you claim?
- What costs you cannot claim?
- Share Matching Rules
- Same day transactions
- 30 Day Matching Rules
- Share Pooling
It should be noted that those marked * can also apply to those who trade cryptoassets. This article is regarding the rules on share trading taxation for individuals.
Any information in this article cannot be taken as investment advice nor any specific taxation advice and if unsure you should always seek the advice of a professional who can gain an understanding in your personal circumstances. With taxation rules always evolving this information may become out of date and this is no substitute for professional advice.
Restricted Share Units
If you have Restricted Share Units you should also refer to this article.
ISA and Non-ISA
You can invest in shares, either via an ISA or not.
ISA
The main advantage of an ISA is that you can currently pay in up to £20,000 per tax year and any income or gains made are totally tax-free. Some individuals have managed to become ISA millionaires after years of investment since its introduction on 6 April 1999.
Although ISA’s are totally tax free that also means that if you lose money within an ISA you also are not eligible for tax relief on these losses.
Non-ISA
Investing via a share trading account means that any income or gains received is taxable. Although there are some reliefs.
For dividends you do not have to pay any dividend tax if your total dividends are £2,000 or less (23/24: £1,000 and 24/25 £500). However, it can have other impacts on tax as mentioned below.
For Capital Gains Tax, currently you do not need to pay tax if your gains in a tax year are £12,300 or less (23/24 £6,000 and 24/25 £3,000). You could also make use of a spouse’s allowance by making a no gain no loss transfer.
Additionally if you do make a loss with Capital Gains Tax you can use this as mentioned further in this article on the taxation of shares.
How to determine your Capital Gains Tax Rate
The Capital Gains Tax rates for shares (and crypto) start at 10% for a basic rate taxpayer or 20% for a higher or additional rate taxpayer.
If you’re a basic rate taxpayer, the rate you pay depends on the size of your gain and your taxable income. To establish how much you need to pay:
- Work out how much total taxable income
- Work out your taxable gains after your annual exemption.
- Add this amount to your taxable income.
- If this amount is within the basic Income Tax band you’ll pay 10% on your gains. You’ll pay 20% on any amount above the basic tax rate.
Example based on 22/23
Your taxable income is £30,270 and you have Capital Gains from your share trading after your Annual Exemption of £35,000.
You have £20,000 before you become a higher rate taxpayer, which is therefore taxed at 10%. The remainder of the gain – £15k is then taxed at 20%.
Tax planning tip – if you had made a property gain then you would want to consider using this against the basic rate band first, as it saves 2%.
Dividends
Companies often return excess profits to its shareholders by way of a dividend. In the UK:
- Dividends do not have any taxation deducted from them when paid out to shareholders.
- Provided you do not receive more than £2,000 (22/23: £1k, 23/24 £500) of non-ISA dividends there will not be any dividend taxation due. These still need to be included on your tax return. Please note that it could still result in loss of personal allowance, restriction of child benefit, impact a marriage allowance claim, amongst other things.
- Dividends are taxed after Non-Savings Income and Savings Income, so are taxed at your highest tax rate.
- Dividends do not qualify as earned income with regards to pension contributions.
What if you do not receive cash?
It is possible to receive a dividend by not actually receive the cash. These are called stock dividends, also known as SCRIP or a DRIP. This is where when you receive a dividend you elect to not receive the cash but reinvest it back into the shareholding instead. These are still taxable under the dividend tax rates and are also included as buys when calculating your Capital Gains Tax.
Main advantage
- By reinvesting your dividends back into the company creates a compound effect, whereby you increase your shareholding. This increased shareholding means if the company maintains or increases its dividend payments, you will receive a larger amount in the future, as the Gain is reinvested.
Main disadvantage
- You still have to pay the tax on the dividends but you do not have the physical cash from the dividends to do this.
- You could be re-investing when the share value is higher than you would be looking to buy at.
I pay tax on my dividends?
If you receive a dividend from a REIT (Real Estate Investment Trust) you will suffer tax at 20% when receiving your payment. These are not normal dividends and are instead called Property Income Distributions (PID). PID need to be included within the tax return as other income, with the tax deducted being shown.
You may also receive foreign dividends and these may be subjected to a withholding tax.
Capital Gains Losses
When a loss is made from Share Trading. It is important to note a loss is only made once it is disposed of and you need to consider if you re-buy that share back within the matching rules period, as it could become a gain! This is explained below.
Any Capital Loss is:
- Automatically offset against a Gain in the year, which could result in you wasting your Annual Exemption
- Any loss not used in the year can be carried forward against a future Gain and is used after the current year Annual Exemption
It is important to note that you cannot carry back a Capital loss to the previous tax year. This is explained in the next section.
A tax planning tip – a loss from share trading does not need to be offset against another share trading gain. You can offset this against a residential property gain!
Tax and Capital Loss Issues
As mentioned above you cannot carry back a Capital loss, this can lead to issues with paying tax liabilities. Why?
An example – say you purchased 50,000 shares in IAG in June 2012 for £1 = £50,000 and then sold these for £4.30 in December 2020 (£215,000) you would have a gain of £4.30 – £1 * 50,000 = £165,000. This would result in tax of ~ £33,000 assuming the Annual Exemption is already used.
If you then decided to reinvest the £215,000 when the share price had dipped in January 2021 to £3.80 to increase your shareholding to 56,500 shares to try and increase future dividends rather than have the paper gain. However, due to COVID and the lockdowns no one saw coming, the price started to dive and you sold all the shares when it was £1.15 in May 2021 concerned about the future of the company and received £65,000. This creates an actual loss of £150,000.
A gain has therefore occurred in the 20/21 tax year resulting in tax due of £33k by 31 January 2021.
A Loss then occurred in 21/22 tax year of £150k equivalent to effectively £30k of tax, but you can’t carry these losses back.
From the original investment of £50k you now effectively have £65k less the tax of £33k = £32k and losses of £150k to carry forward.
This is not financial advice but you should always consider your tax liabilities when making large gains and looking to re-invest the proceeds. We have seen with cryptoassets in particular the 2018 year that some individuals had tax liabilities greater than their current cryptoasset holdings.
It can therefore be wise to sometimes not reinvest all the proceeds and keep some back for tax. Although this may mean you lose out on rising prices, you do not have as nasty shocks.
Capital Gains Tax on Share Trading
The way the taxation of shares in the UK works is found within TGCA 1992 Part 4 Chapt. 1. The rules are commonly known as either:
The share matching rules are complex and if you are making a number of transactions then trying to keep manual records will be difficult and could lead to errors. We rely on our accountancy software suite, which does the calculations.
What costs can you claim?
When making a sale of a share you incur costs of disposal. Any expenditure that is allowed to be offset against the sale must have been incurred wholly and exclusively for the purposes of the acquisition or disposal.
Allowable incidental costs are limited to
- fees, commission or remuneration paid for the professional services of any
- surveyor, valuer or auctioneer
- accountant or agent
- legal adviser
- transfer or conveyance costs (including Stamp Duty or Stamp Duty Land Tax)
- advertising to find a buyer or seller
- costs reasonably incurred in making any valuation or apportionment required for the purposes of the Capital Gains Tax computation.
What costs you cannot claim?
Costs that will not be allowed to be offset against the gain are:
- journals or subscriptions to share magazines or websites
- account holding fees
- accountant costs calculating the Capital Gains Tax amount for the tax return
- electricity and computer costs
Share Matching Rules
Share matching rules apply, to identify disposals of shares or securities with particular acquisitions. Provided the securities are of the same class (e.g. not subject to different rights) and are acquired in the same capacity (so an acquisition as trustee would be in a different capacity to acquisition as an individual).
This means that all shares or cryptocurrencies of the same type are grouped together for the purpose of share matching rules.
Disposals are identified in the order in which they take place, i.e. securities disposed of on an earlier date are identified before securities are disposed of on a later date. Securities disposed of are identified with acquisitions in the following order:
(1) acquisitions on the same day as the disposal;
(2) acquisitions within 30 days after the day of disposal (except where made by a non-resident). Disposals are identified first with securities acquired earlier within the 30-day period after disposal – the First In First Out basis (FIFO);
(3) any shares acquired before the date of disposal which are included in an expanded ‘section 104 holding’;
(4) if the above identification rules fail to exhaust the shares disposed of, they are to be identified with subsequent acquisitions beyond the 30-day period following the disposal.
The 30-day rule above stops such practices as bed and breakfasting, which would enable an individual to realise a gain up to the Annual Exemption amount tax free without taking a risk e.g. selling on 5 Apr and buying back 6 Apr.
Same day transactions
Before a disposal is identified with any previous acquisition or the pool, it is matched, as far as possible, with acquisitions on the same day which are made in the same capacity. For this purpose, all acquisitions on the same day are treated as if they were made by a single transaction and all disposals on that day are similarly treated as made by a single transaction (TGCA 1992, s.105(1))
For example if you had effectively 4 buy transactions/entries and 2 sell transactions/entries all on the same day of the 18 January 2019 (as below) you are treated as making on that day one Buy of 4 X at £12,025 and one Sell of 3 X for £9,100.
|
Date |
Buy/Sell |
Units | Share/crypto |
Value (£) |
|
18/01/2019 |
Buy |
1.0000 |
X |
3,000.00 |
|
18/01/2019 |
Buy |
1.0000 |
X |
3,050.00 |
|
18/01/2019 |
Buy |
1.0000 |
X |
2,975.00 |
|
18/01/2019 |
Buy |
1.0000 |
X |
3,000.00 |
|
18/01/2019 |
Buy |
4.0000 |
X |
12,025.00 |
|
Date |
Buy/Sell | Units | Share/crypto | Value (£) |
|
18/01/2019 |
Sell |
2.0000 |
X |
6,100.00 |
|
18/01/2019 |
Sell |
1.0000 |
X |
3,000.00 |
| 18/01/2019 | Sell |
3.0000 |
X |
9,100.00 |
30 Day Matching Rules
Under current legislation, where a person disposes of shares and then acquires shares of the same class in the same company within 30 days following the day after that disposal, the shares disposed of are matched with the subsequent acquisitions in priority to any acquisition of such shares before the date of the disposal. Where there is more than one acquisition in that 30-day period, the earliest acquisition is matched first TGCA 1992, s. 106A (5).
For example having grouped all same day transactions together there is a Sell on 19/01/2019, so:
- Step 1 – look if there is a buy on the same day – No.
- Step 2 – look if there is a buy in the next 30 days – Yes on 22/01/2019
| Date | Buy/Sell | Units | Share/Crypto | Value (£) |
Gain/(Loss) |
|
|
18/01/2019 |
Buy |
4.0000 |
X |
12,025.00 |
||
|
18/01/2019 |
Sell |
(3.0000) |
X |
(9,100.00) |
81.25 |
|
| Pool |
1.0000 |
X |
3,006.25 |
|||
| Same Day transaction so automatically matches | ||||||
|
19/01/2019 |
Sell |
(1.0000) |
X |
(5,000.00) |
||
| Sell so look for buy on same day – none so FIFO next buy if within 30 days | ||||||
|
22/01/2019 |
Buy |
1.0000 |
X |
2,000.00 |
3,000.00 |
|
| Pool |
1.0000 |
X |
3,006.25 |
|||
| Buy within 30 days of Sell so matched off and new revised Pool | ||||||
The share pool carried forward therefore retains the amounts created on 18/01/2019.
Due to the 30 day rule you therefore need to take into account data up to 5 May when preparing your calculations.
Share Pooling
Pooling is an arrangement for treating a person’s holding of shares of the same class as a single asset which grows as further shares are acquired and diminishes when there is a disposal of part of the holding TGCA 1992, s.104(1). Under this arrangement, when there is a disposal of only some of the shares in the holding, it is treated as a disposal of part of an asset and the acquisition cost of those shares for chargeable gains purposes is not their actual cost but a proportionate part of the cost of all shares in the holding TGCA 1992, s.104(6) for part-disposals generally.
If a partial match from a sell against a future buy is made and this leaves units of the buy remaining. This proportion remaining is added to the pool to be carried forward and matched against any future sell, which does not get matched with a same day buy or buy within the next 30 days.
In the example below it is still a more simplistic version that what could happen with a larger volume of transactions, as when you build more date in it gets more complex. However, it covers:
- Same day transactions
- Matching a Sell with a buy in the next 30 days
- Buy with no prior Sell within 30 days and is therefore added to the pool
- Matching a next 30 day buy with sell, but there is a same day transaction in between the matched transactions
- Matching the Pool with a Sell
Example
| Date | Buy/Sell | Units | Share/Crypto | Value (£) | Gain/(Loss) | |
|
18/01/2019 |
Buy |
4.0000 |
X |
12,025.00 |
||
|
18/01/2019 |
Sell |
(3.0000) |
X |
(9,100.00) |
81.25 |
|
| Pool |
1.0000 |
X |
3,006.25 |
|||
| Same Day transaction so automatically matches | ||||||
|
19/01/2019 |
Sell |
(1.0000) |
X |
(5,000.00) |
||
| Sell so look for buy on same day – none so FIFO next buy if within 30 days | ||||||
|
22/01/2019 |
Buy |
1.0000 |
X |
2,000.00 |
3,000.00 |
|
| Pool |
1.0000 |
X |
3,006.25 |
|||
| Buy within 30 days of Sell so matched off and Pool is the same | ||||||
| 23/01/2019 |
Buy |
5.0000 |
X |
15,000.00 |
||
| Pool |
6.0000 |
X |
18,006.25 |
|||
| Buy, no same day disposal so added to Pool | ||||||
|
24/01/2019 |
Sell |
(2.0000) |
X |
(8,000.00) |
||
| Sell so look for buy on same day – none so FIFO next buy if within 30 days | ||||||
| Next Buy 25/01/19 has a same day transaction and is therefore ignored for this Sell. | ||||||
| Next Buy – within 30 days for 4 X so it needs to be apportioned for the 2 X Sell | ||||||
| 26/01/2019 |
Buy |
4.0000 |
X |
17,000.00 | ||
| Buy of 4 X so 2 X is worth £8,500. This is used against Sell of 2 X for | ||||||
| £8,000 and the remaining 2 X of £8,500 goes into the s.104 Pool | ||||||
| Pool |
8.0000 |
X |
26,506.25 |
(500.00) |
||
|
25/01/2019 |
Buy |
1.0000 |
X |
3,300.00 |
||
|
25/01/2019 |
Sell |
(1.0000) |
X |
(3,500.00) |
200.00 |
|
| Same Day transaction so automatically matches | ||||||
|
27/01/2019 |
Sell |
(8.0000) |
X |
(70,000.00) |
43,493.75 |
|
| No future buys so match off with Share Pool | ||||||
| Overall in the period | Sells |
95,600.00 |
||||
| Buys |
(49,325.00) |
|||||
| Gain |
46,275.00 |
|||||
Assistance
This article does not cover everything you need to be aware of. If you require any assistance or further information regarding the Taxation of Shares please contact us. A member of our team will be happy to help.
