Various taxes need to be paid in respect of company shares. Shareholders should be aware of the tax liabilities that may arise when they buy, sell, or make any money from their shareholdings. We will consider the specific forms of tax on shares below.
1. Stamp Duty – buying shares
Stamp Duty is most commonly associated with the large sum of tax you need to pay when you buy a house. However, Stamp Duty is also payable on the purchase of shares. The standard rate of Stamp Duty tax on shares is 0.5% of the transaction, which takes effect if:
- shares are purchased electronically of any value through the ‘CREST’ system – Stamp Duty Reserve Tax (SDRT) is deducted automatically.
- shares are purchased using a paper stock transfer form and the transaction is over £1,000 – Stamp Duty is payable to HMRC (this is rounded up to the nearest £5). No tax is payable for shares purchased via a stock transfer form where the transaction is less than £1,000.
Stamp duty is calculated based on the price paid for shares, irrespective of their actual market value. Transactions, where SDRT or Stamp Duty must be paid in respect of shares, include where the following are purchased:
- Existing shares in a company incorporated in the UK
- An option to buy shares or an interest in shares
- Shares in a foreign company that has a share register in the UK; or
- Rights arising from shares (e.g., rights which are acquired when new shares are issued)
Tax does not need to be paid in respect of shares purchased if:
- No money is paid for shares (i.e., they are given free of charge)*
- A subscription is made to a new issue of shares in a company
- Shares are bought in an ‘open-ended investment company’ (OEICs); or
- Foreign shares are purchased outside the UK (although other taxes may be payable).
* If shares are inherited, these will be liable for inheritance tax – similarly, if they are gifted within 7 years of the death of the gifter of the shares.
Special share arrangements
A higher level of SDRT or Stamp Duty at 1.5% must be paid if shares are transferred into some ‘depositary receipt schemes’ or ‘clearance services’ (where the transfer is not an integral part of an issue of share capital).
This can occur when the shares are transferred to a service operated by a third party such as a bank – where they can then be traded free of Stamp Duty or SDRT.
It is advisable to speak to your accountant if in any doubt, as this is a very complex area.
2. Capital Gains – selling shares
Capital Gains Tax (CGT) must be paid in respect of any gains/profits made in respect of shares that are subsequently sold or disposed of (e.g., given away).
How to work out the gain
To work out the relevant gain for the purposes of CGT, it is necessary to calculate the difference between the price paid for the shares and the price they were sold at. This price difference comprises the gain, which is then taxed.
In some cases, the market value will need to be used to work out the gain, for example, if the shares:
- are given away as a gift (unless the recipient is the spouse or civil partner of the shareholder, or a charity)
- are sold at undervalue (i.e., for less than they were worth)
- were inherited and the Inheritance Tax value is unknown
- were owned prior to April 1982; or
- were acquired through certain Employee Share Schemes.
If shares are gifted or sold by someone who claimed Gift Hold-Over Relief (see below), the amount that person paid for them should be used to work out the gain. If they were sold at undervalue, the amount paid for them should be used to work out the gain.
Deducting costs and applying reliefs
Certain costs of buying or selling shares from any gain can be deducted, including:
- Fees, e.g. stockbrokers’ fees; and
- Stamp Duty Reserve Tax (SDRT) paid when shares were purchased.
The following forms of tax relief are available:
- Business Asset Disposal Relief – 10% CGT is payable instead of the normal rates if shares are sold in a trading company for which the shareholder works and holds at least 5% of the shares and voting rights.
- Gift Hold-Over Relief – No CGT is payable if shares are given away in a personal company or unlisted company (instead the giftee pays tax when they sell the shares).
- Enterprise Investment Scheme (EIS) – CGT can be delayed or reduced if the shareholder uses a gain to buy unlisted shares in companies approved for EIS.
- Seed Enterprise Investment Scheme (SEIS) – No CGT is payable on a gain of up to £100,000 if this gain is used to buy new shares in small early-stage companies approved for SEIS.
- Rollover relief – CGT payment can be delayed if the shareholder sells unlisted shares to the trustees of a Share Incentive Plan (SIP) and uses the proceeds to buy new assets.
Once the level of gain has been ascertained, it is necessary to work out the extent of liability for Capital Gains Tax.
There is a CGT Allowance (i.e., the amount of gains which can be made without being subject to any tax) which stands at £12,300 in the tax year 2020-21 (see GOV.UK for the current rate).
Any gains which exceed the CGT Allowance will be subject to the relevant level of taxation – for the tax year 2020-21 these are:
- Basic rate tax band (i.e. income of £12,501 to £50,000) = 10%
- Higher and Additional rate tax band (i.e. income above £50,000) = 20%
This HMRC calculator can be used to work out the extent of CGT liabilities if shares sold were (i) the same type, acquired in the same company on the same date and (ii) sold at the same time. The calculator cannot be used if other shares (or chargeable assets) were sold in the tax year.
When CGT is not paid
Capital Gains Tax is generally not payable in respect of:
- Shares which are given as a gift to the shareholder’s husband, wife, civil partner or a charity;
or where the following are disposed of:
- Shares which have been put into an ISA or PEP;
- Shares in employer Share Incentive Plans (SIPs);
- UK government gilts (including Premium Bonds);
- Qualifying Corporate Bonds; or
- Employee shareholder shares (depending on when these were obtained).
3. Dividend Tax – income from shares
Shareholders will often receive dividend payments. As long as this falls within their Personal Allowance (i.e., the amount of income that can be earned tax-free), there will be no tax to pay.
In the current 2020-21 tax year, the Personal Allowance is £12,500. In addition to the Personal Allowance, shareholders who receive dividend payments up to £2,000 do not need to pay tax on this dividend income. This is known as the Dividend Allowance.
Shareholders are liable to pay Dividend Tax on any payment above £2,000 that exceeds their Personal Allowance. The rate of taxation will depend on the individual’s tax bracket. The current rates of dividend payment and tax brackets are as follows:
- £12,501 to £50,000 (Basic rate) – 7.5%
- £50,001 to £150,000 (Higher rate) – 32.5%
- Over £150,000 (Additional rate) – 38.1%
It is worth noting that these rates of Dividend Tax are lower than the equivalent levels of Income Tax.
Any dividend payments under the £2,000 threshold do not need to be declared to HMRC. Furthermore, tax does not need to be paid in respect of shares held in an ISA.
Example of Dividend Tax payments
A shareholder receives £5,000 in dividends and earns £20,000 in income from their job during the 2020-21 tax year. This equates to a total of £25,000.
The Personal Allowance (£12,500) is deducted from the total of £25,000, leaving £12,500 (£7,500 of which is subject to Income Tax – and the other £5,000 of which comprises dividend payments).
£7,500 income is taxed at the basic Income tax rate of 20% = £1,500.
The Dividend Allowance (£2,000) is deducted from the total £5,000 dividend payment. The remaining £3,000 is taxed at the basic Dividend Tax rate of 7.5% = £225.
The total tax bill will be £1,500 + £225 = £1,725.
How is Dividend Tax paid?
Dividend Tax is paid differently, depending on whether the total dividend payments exceed £10,000 for the tax year.
£10,000 or less to pay
HMRC should be informed by contacting the Income Tax helpline and/or asking them to change the tax code for the shareholder. In this case, it may be possible for tax to be drawn from any wages or pension. Alternatively, it can be included as part of the regular Self Assessment tax return.
Over £10,000 to pay
In this case, a Self Assessment tax return must be completed. If the shareholder is not already registered for Self Assessment, they must register by 5th October following the tax year in which the dividend payments were received.