Ask Jenny Ross: Will I face a big capital gains tax bill if I decide to sell shares?

Question: I’m thinking of selling some shares and want to understand the capital gains tax implications. I saw something called the ‘Bed & Breakfast’ rule. What does it mean?

Any gains made from assets held in a stocks and shares Isa are made completely free of income tax, dividend tax and capital gains tax
Any gains made from assets held in a stocks and shares Isa are made completely free of income tax, dividend tax and capital gains tax

Answer: Where you hold your shares is a critical factor in determining whether and how much capital gains tax you pay when you sell them for a profit.

For most people, the first port of call should be a stocks and shares Isa. This is a tax-free investment account that allows you to invest up to £20,000 in the current tax year.

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Any income, dividends or capital gains made from the assets you hold with a stocks and shares Isa are made completely free of income tax, dividend tax and, crucially, capital gains tax.

Capital gains tax only becomes an issue on shares held outside an Isa (and a pension, which also grows free of capital gains tax).

But you have a tax-free allowance of £12,300 in the 2021-22 tax year, which means the tax is only payable on profits above that amount. Tax is charged at ten per cent if you are a basic-rate taxpayer, and 20 per cent if you’re a higher or additional-rate taxpayer.

It’s possible that you could pay both rates on your profits should the amount you make tip your total income into a higher tax bracket.

If you hold a significant sum outside of an Isa, I can understand why you would want to minimise the potential for a fifth of your profits to disappear in tax.

But the ‘Bed and Breakfast’ strategy you mention is complicated and has been outlawed by HM Revenue and Customs.

It describes the situation where someone sells some of their shares to realise a gain, typically at the end of the tax year, to use up their tax-free allowance and then repurchasing the shares within 30 days of the sale.

This practice was banned in 1998. If you do this now, HMRC will treat the shares as if they have never been sold, so that any profit in the future you make is calculated using their original purchase value – pushing a potential tax bill higher.

There are a few ways you can legitimately save money with your shares.

The first tactic is called ‘Bed and Isa’. This involves selling your shares, and repurchasing them within a stocks and shares Isa, meaning that capital gains tax would not be liable on them in the future.

Remember, you can only invest £20,000 a year, and you may need to pay some capital gains tax on the difference between the Isa limit and your tax-free allowance.

You may also want to consider gifting shares to a spouse or civil partner, which wouldn’t incur inheritance tax. They could sell them and use their own tax-free allowance, or reinvest the funds in a stocks and shares Isa or a pension to shelter it from tax. Gifted shares will be valued at the original purchase cost, not the price when you gifted them, making transfers between spouses very beneficial.

If you have a significant sum invested, it may be worthwhile making another investment – in professional financial advice.

Tax planning is bread butter stuff for qualified financial advisers, who can help you understand your goals and future plans, and advise you on the best ways to maximise your portfolio.

Make sure they are fully regulated by the Financial Conduct Authority – you can find out at register.fca.org.uk.

Jenny Ross is the editor of Which? Money.

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