An Introduction into CGT (Capital Gains Tax)

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.

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 the flat rate of 18% (effective from 6 April 2008) depending on the size of the gain.

A typical capital gains tax calculation is summarised in the table below.

Typical CGT Calculation
Proceeds	X
Less
Acquisition cost	(X)
Deductible expenses	(X)

Chargeable gain	X

Less:
Annual exemption	(X)

Taxable gain	X

Example

Aaron sells shares for £50,000 in December 2009. He bought them for £23,000 in December 2007. His profit is therefore £27,000. 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 £10,100 and deducting this leaves a taxable gain of £16,900. For a resident in the United Kingdom this will be taxed at the flat rate of 18%.

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'...

What Assets are Subject to CGT?

Although it's also important to point out that not all assets fall into the capital gains tax net.

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

Avoiding capital gains tax is possible but not for the uninitiated. 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.

Who Pays Capital Gains 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.
Read a full paper on taxable and tax-advantaged portfolio management (UK Investors)

[Note: Paper is dated 2007] (430 Kb)