Capital gains tax for individuals on the disposal of UK shares

If you are a UK resident and dispose of an asset for a profit, you may need to pay capital gains tax (CGT), this includes shares you hold in the UK and overseas.

The amount charged is dependent on your marginal tax rate band. Individuals who pay tax at the basic rate pay CGT at 10%, and individuals who are higher or additional rate taxpayers pay 20% in CGT. However, if you are a basic rate taxpayer and the gain you have made pushes part of your income into the higher rate band, you would pay 20% on however much falls into the higher income band.

You will only need to pay tax if the total profit on capital gains you have made in the year is more than the annual exempt amount. For the 2022-23 tax year, this is £12,300. Most trustees have an annual exempt amount of half the amount that applies to individuals.

When you don’t need to pay Tax

You do not need to pay tax on CGT to HMRC when you dispose of the following:

• Qualifying Corporate Bonds (QCB)
• Shares within an ISA, PEP, or a Share Incentive Plan (SIP)
• UK Government gilts
• Employee shareholder shares

Under CGT rules, you are not liable to pay tax when you are gifting shares to a spouse, civil partner, or to a charity.

Individuals who are not UK residents for tax purposes are not subject to CGT on shares in UK companies unless they return to the UK within five years of leaving.

Planning Point

If you have a spouse, you can make use of their annual exemption too, by taking advantage of the nil gain nil loss transfer to the spouse, prior to disposing of the asset.

Calculating CGT liability on shares

If you sell shares of the same class and for the same company, these are considered to be identical, irrespective of the different times or cost of acquisition. However, there are special identification rules required to match disposals with multiple acquisitions.

These disposals are to be identified in the following order:

• Acquisitions on the same day as the disposal
• Acquisitions within 30 days after the disposal
• Shares comprised in the “section 104 holding”

Section 104 holding

‘Any number of securities of the same class acquired by the same person in the same capacity shall for the purposes of this Act (subject to express provision to the contrary) be regarded as indistinguishable parts of a single asset growing or diminishing on the occasions on which additional securities of the same class are acquired or some of the securities of that class are disposed of.’ TCGA92/S104

To summarise, a section 104 holding is where all shares are pooled and treated as one single asset. When a proportion of the shares within a pool are disposed of, the overall value of the share pool is apportioned to determine the cost of the shares sold.

The market value of shares

When calculating profit, there are certain cases that require the use of the market value of the share. The cost at which the share was purchased becomes irrelevant.

These cases are as follows:

• Someone other than a spouse, civil partner or charity received the share as a gift from you
• You were the owner of the share prior to 1982 (These shares are subject to the “general debasing rule”)
• You disposed of the share for a loss
• You receive the share as part of an employee stock purchase plan

CGT in employee shares

You may acquire shares for the company you work at through an employee scheme at work.

Share Incentive Plan (SIP)

Shares are purchased or awarded and held within a plan for the employee. With this plan, there is no CGT while the shares are in the plan or when the shares are transferred to you. You are treated as if you had acquired the shares at their market value at the time of purchase, and therefore there will be no CGT if the asset is sold immediately.

Save-as-you-earn (SAYE)

With this plan, money is saved monthly to build up savings that earn a tax-free bonus over a period of either three, five or seven years. At the end of this plan, the money can either be withdrawn from your savings, or they can be used to purchase shares in your employers’ company.

There may be a CGT liability at the point of selling the shares, and the taxable gain or loss will be based on the sale price, minus the price the share was purchased for.

Company share-option scheme (CSOP)

You have the option to purchase shares within the company you work for at a set price at a future date. If you take up the option, you may have a taxable gain. This is calculated using the share price, minus the price at which the share was acquired for, minus any additional costs you may have encountered when purchasing the option.

Enterprise-Management Incentive (EMI)

Similarly, to CSOP, you are given the option to buy shares in the company at a set future date and at a set price.

However, if the set price is less than the market value of the shares on the date the option is granted, this perk counts as part of the employment income on which you pay income tax.

The CGT liability will be based on the sale price, minus the price of acquisition, minus any additional costs you may have encountered and taking away any income tax which may have already been paid when the option was granted.

Disposal of shares held in your own company

When disposing of shares in your personal trading company, business asset disposal relief (prior to 6 April 2020 known as entrepreneurs’ relief) reduces the CGT rate to 10%. It can apply if you are selling shares in your business subject to the following conditions.

To qualify, both of the following must apply for at least two years up to the date you sell your shares:

• you’re an employee or office holder of the company (or one in the same group)
• the company’s main activities are in trading (rather than non-trading activities like investment) – or it’s the holding company of a trading group

The business must be a ‘personal company’. This means that you have at least 5% of both the:

• shares
• voting rights

You must also be entitled to at least 5% of either:

• profits that are available for distribution and assets on winding up the company
• disposal proceeds if the company is sold

The conditions must be satisfied right up until the disposal of the shares. Particular care needs to be taken to ensure that the 5% shareholding is not lost before the disposal of the shares, by a dilution of the individual’s shareholding, such as on the exercise by others of share options. An individual can effectively ‘bank’ business asset disposal relief on gains that have arisen up to the date when investment by an external investor on or after 6 April 2019 causes the individual’s shareholding to fall below 5%.

There’s no limit to how many times you can claim Business Asset Disposal Relief. However, there is a lifetime limit of £1 million in Business Asset Disposal Relief. If sold prior to 11 March 2020 the limit was £10 million.

Deadline

If the company stops being a trading company

If the company stops being a trading company, you can still qualify for relief if you sell your shares within three years.

Planning point

If when you sell your shares, some of the consideration is paid by way of an earn out, careful consideration needs to be given to structuring the transaction in order to maximise the amount of entrepreneurs’ relief available.

Investors’ relief

Investors’ Relief reduces the amount of CGT on the disposal of shares in a trading company that is not listed on a stock exchange.

The main conditions are:

• Shares that are issued on or after 17 March 2016
• Shares have been owned for at least three years up to the date of disposal.

It is not usually available if you or someone connected with you is an employee of the company.

If conditions are satisfied, it reduces the amount of CGT to 10% and there is a separate lifetime limit of £10 million of gains that can qualify.

In conclusion

Although a number of key areas have been discussed above, there are additional considerations if you wish to defer gains by using tax-efficient investments, for example, EIS investments.

If you are considering disposing of shares that will most likely give rise to a significant capital gains tax liability, please speak to our experienced team before making the disposal.