Please explain how capital gains tax works in UK?

Question

Please explain how capital gains tax works in UK

Let's use an example for clarity.
Say you buy 100 shares of XYZ stock at £10 for £1000.
Six month later you buy another 50 shares of XYZ at £15, or £750 for this trade.
Another six month later you sell 75 shares of XYZ at £20 and receive £1500 for this trade. After this you still have 75 shares left.

Ignoring commissions, how much capital gain/profit do you report on that sale of 50 shares?
How much tax might you pay on that sale if you're already at the maximum tax bracket in your particular location?

Thanks in advance. I actually live in Canada so please excuse me if the example seems weird.

Answer 1

As there is more than one purchase you need to follow the share identification rules to work out which shares are deemed to be sold.

So you match the 75 shares sold in this order.

1. Shares bought on the same day as the sale.
2. Shares bought in the 30 days after the sale
3. Then use a LIFO (Last In First Out) method on shares bought sfter 5th April 1998.
4. Other rules apply to earlier holdings which aren't relevant here.

In your example number 3 is the first one to kick in so you are deemed to have sold the 50 shares bought six months before the sale and 25 of the ones bought one year ago.

The 50 shares make a profit of £250 (£1,000 - 750).

The 25 shares also make a profit of £250 (£500 - 25% of 1,000)

Total gain is £500.

The calculations should always be carried out separately as I have done as the two parts will have different periods of ownership for taper relief purposes. But that's another whole set of rules.

Our highest rate of tax is 40% so if you are already earning enough to pay that then the gains would also be taxed at 40%. But don't forget that there may be an annual exemption available which will cover small gains.