Quick answer – yes. Long answer – there are different situations when company shares attract taxes or not. To keep yourself in the HMRC good books, you need to be up to date with the tax commitments that may arise when you buy, sell, or earn income from any shareholdings.
Here is an overview of the different scenarios that attract tax:
Buying shares and the application of stamp duty
When buying a house, you will pay Stamp Duty. Stamp Duty will also be paid, at a standard rate of 0.5% of the transaction value, when you purchase shares. It comes into effect when:
You purchase electronically through the ‘CREST’ system. The Stamp Duty Reserve Tax is deducted automatically in the course of the transaction.
You purchase shares for a total value of more than £1,000 using a paper stock transfer form. The Stamp Duty is payable to HMRC.
Stamp duty is calculated on the prices paid, not on actual market value. The following share transaction types will also attract Stamp Duty:
Purchasing existing shares in a UK incorporated company
Purchasing options to buy shares
Purchasing an interest in shares
Purchasing from a share register in the UK of a foreign company
Purchasing rights arising from shares
Stamp duty free options
The following transactions do not require you to pay tax on shares:
When shares are given for free*.
When you make a subscription against a new issue of shares in a company (e.g. venture capital).
When you invest via shares in an ‘open-ended investment company’ (e.g. a unit trust fund).
When you purchase foreign shares outside the UK (note: other taxes might apply).
* In the case of inherited shares, inheritance tax will be due. In addition, gifted shares within 7 years of the death of the gifter will also attract inheritance tax.
Special share arrangements and the application of stamp duty
In some transactions, shares are transferred into a depositary receipt scheme whereby the transfer is not a constitutive part of an issue of share capital. This attracts a higher level of Stamp Duty Reserve Tax at 1.5%.
An example of such a transfer is when a bank (or another third party) gives you a trading vehicle to hold shares in the equity of companies in foreign countries as opposed to the investor trading directly on an international market. Thereafter, the trading is free of Stamp Duty.
This is a tricky area and verification of the tax implications for your unique transactions should always be obtained from an accountant experienced in this area.
Selling shares and capital gains tax
Any gains, profits or earnings that are made in respect of shares, from selling or disposing of, will attract Capital Gains Tax.
The gains tax is calculated on the difference (the gain) between the shares’ purchasing and selling price.
The market value can be applied as the sales price in the following instances:
If shares are given away as a gift. This does not apply if the recipient is the spouse of the shareholder or a charity.
If the sale is deemed undervalue.
If the shares are inherited, and the Inheritance Tax value is unknown.
If ownership was gained prior to April 1982.
If the shares were given through certain Employee Share Schemes.
When shares are gifted or sold by a person who previously claimed Gift Hold-Over Relief, the amount that person paid for them is used in the gain calculation.
Deducting costs and the application of reliefs to Capital Gains Tax
Certain share transaction costs can be deducted from a gain, such as stockbroker fees and Stamp Duty paid at the time of purchase.
The applicable tax relief options are:
BADR or Business Asset Disposal Relief –
If the shares are sold in a trading company within which the shareholder works, and that shareholder has at least 5% of the shares and voting rights, then a ten per cent Capital Gains Tax is applicable instead of the normal rates.
GHOR or Gift Hold-Over Relief –
If shares are given away in a personal company, or if shares are given away in an unlisted company, then no Capital Gains Tax is payable. However, when the recipient sells the shares, they will pay tax.
EIS or Enterprise Investment Scheme –
Capital Gains Tax can be delayed or reduced if the shareholder uses the gain to purchase unlisted shares in EIS-approved companies.