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A capital gain is the profit you make when you sell an asset for more than you paid for it. If you make a capital gain on the sale of shares, then subject to the exceptions set out below you will usually be liable to pay Capital Gains Tax (CGT).
Your gain is usually the difference between what you paid for your shares and what you sold them for. In some situations, the seller is required to use the market value instead, for example, if the shares were sold for less than they were worth.
CGT is normally charged at a simple flat rate of 20% and this applies to most chargeable gains made by individuals. If basic rate taxpayers only make a small capital gain, they may only be subject to CGT at a reduced rate of 10%. If the basic rate taxpayer makes a chargeable gain that pushes their taxable income into the higher rate threshold, then they will pay some CGT at both 10% and 20% on the relevant amounts. A higher rate of CGT applies (18% and 28%) to gains on the disposal of residential property (apart from a principal private residence).
There are annual limits that allow taxpayers to make a certain amount of tax free capital gains each year. The annual CGT exemption for individuals is £12,300 for 2020-21. Spouses and civil partners are taxed independently of each other and therefore each benefit from a separate exemption. Spouses and civil partners do not usually have to pay CGT on the transfer of assets (including shares) to their spouse or civil partner.
Your liability to pay CGT on the sale of shares is based on the date the shares were sold. This is the date the bargain actually took place and not the date of the contract note or the date of settlement.
The usual due date for paying any CGT to HMRC is the 31 January, see below for residential property sales’ reporting date, following the end of the tax year in which a capital gain was made. This means that CGT will be payable for any gains made during 2020-21 on or before 31 January 2022.
Taxpayers who are planning to make a gain towards the end of a tax year could benefit by waiting until the start of the new tax year to crystallise a gain. For example, CGT on shares sold on the 5 April 2021 would be due by 31 January 2022 but if the shares were sold at the beginning of the following tax year i.e. on or after 6 April 2021 then CGT would not be due until 31 January 2023.
The usual way to report a gain is to complete the relevant sections of the Self-Assessment tax return in the tax year after the gain was made. There are separate rules, that came into effect from 6 April 2020, for reporting and paying CGT on the sale of a residential property within 30 days of the completion of the transaction.
If you complete a Self-Assessment tax return then you are required to notify HMRC of any taxable gains using the capital gains pages of the return. If you do not automatically receive a tax return each year you must still notify HMRC that you have a CGT liability.
The law requires you to notify HMRC by 5 October following the end of the relevant tax year. HMRC will then issue a tax return and this must be completed within 3 months and any tax paid by the same deadline. Tax geared penalties and interest are charged when CGT is paid late. In most cases, no declaration of taxable gains is required where total gains in a tax year are less than the annual tax-free allowance.
HMRC also offers a 'real time' CGT service that allows taxpayers to report any gains and pay straight away. Using this service would obviously mean paying any CGT due before the official deadline so we would assume that the use of this service would only be appealing under very limited circumstances.
HMRC’s guidance is clear that you can deduct certain costs of buying or selling your shares from your gain. These include certain fees that were incurred, for example, stockbrokers’ fees and Stamp Duty Reserve Tax (SDRT) charged when you bought the shares.
Sometimes you may sell an asset for less than you paid for it. In such circumstances, you would make a capital loss. You can typically deduct capital losses from capital gains made in the same or future years. In certain circumstances, like having invested under SEIS or EIS you may be able to convert a capital loss into an income tax loss.
Generally, if the asset would have been liable to CGT had a gain taken place then the loss should be an allowable deduction. You may be able to reduce or delay the amount of CGT you have to pay if you are eligible for various tax reliefs such as Business Asset Disposal Relief.