Investment in shares can be a great source of passive income. Despite the dividends received being taxed, you are also taxed in the UK tax system when you sell the shares for more than what you paid for them. This article focuses on the tax implications of selling shares.
Basically, gains that arise from selling shares are considered capital gains and HMRC treats these gains the same way it treats any other capital gain. Therefore, you will be taxed as per the rules of capital gains tax (CGT).
How Much Tax Do I Have to Pay On Selling Shares?
CGT rates for the current year, that is 2021/22 are 10% and 20% for basic and higher rate taxpayers respectively. These rates are different for residential properties but since shares don’t fall in the category of residential properties, we will use the normal 10% and 20%.
In addition, there is an allowance available called the capital gains tax-free allowance which is currently £12,300 meaning that every taxpayer can take home capital gains of up to £12,300 tax-free.
That being said, to find your tax liability on capital gains from selling shares, deduct the CGT allowance from the gains to arrive at the taxable gains figure and apply your marginal CGT rate.
For example, if gains of a basic rate taxpayer from selling shares in the year are 25,000. Their tax liability can be calculated as:
Taxable Gain= £12,700 (25,000-12,300)
Since the individual is a basic rate taxpayer, the taxable gains will be taxed at 10%.
= £1,270 (12,700*10%)
Tax-Free Disposal of Shares
Gains from shares are normally taxed like in the above example. However, there are situations where no tax is applied and the parties can have tax-free exchanges. These include:
- When you gift the shares to your wife, husband, or civil partner.
- When you gift the shares to a charity.
- Shares that have been put into an investment savings account are also exempt for capital gains tax purposes.
- Qualifying corporate bonds or UK government gilts
