Corporate gains tax (CGT) can eat into your investment returns, including shares. Knowing how long you need to hold shares to avoid CGT is key to good tax planning and maximising your investment returns. This article by Darwin Gray’s corporate team, looks at the rules and strategies for CGT on shares in the UK, for investors.
CGT Explained
What is CGT?
CGT is a tax on the profit you make when you sell or dispose of an asset that has gone up in value. This includes shares, property (not your main home) and other investments. It’s applied to the gain, not the total amount you get from the sale.
CGT Allowance
The UK government gives you an annual CGT allowance, which is the amount of profit you can make from selling assets before you pay any tax. For the 2023/2024 tax year the CGT allowance is £12,300. Anything above that is taxed.
CGT Rates
CGT is taxed at your total taxable income rate. Basic rate taxpayers are 10% and higher or additional rate taxpayers are 20%
Holding Shares to Avoid CGT
Tax-Free Investment Accounts
The best way to avoid CGT on shares is to hold them in tax-free investment accounts such as ISAs and SIPPs.
Individual Savings Accounts (ISAs)
· Stocks and Shares ISA: You can put up to £20,000 per year into a Stocks and Shares ISA. Gains within the ISA are CGT and Income Tax free.
· Lifetime ISA (LISA): This is for first-time home buyers and retirement savings, with a maximum annual contribution of £4,000. Like other ISAs, gains within a LISA are tax-free.
Self-Invested Personal Pension (SIPP)
· Tax Relief and Growth: Contributions to a SIPP get tax relief and investments grow CGT free. Withdrawals are taxed but the growth phase is tax-free.
Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)
Investments in EIS and SEIS have significant tax benefits including CGT exemptions.
· EIS: If you hold EIS shares for at least three years any gains on those shares are CGT free. You can also defer CGT on gains from other assets by investing them in EIS shares.
· SEIS: SEIS shares become CGT free after three years. This scheme is for earlier stage companies and has additional tax reliefs.
CGT Strategies
Use CGT Allowance
To minimise CGT sell shares incrementally each year to use up your annual CGT allowance. This spreads the gains over several years and reduces your overall tax bill.
Bed and ISA
The “Bed and ISA” strategy is to sell shares to realise a gain up to the CGT allowance and then buy them back in an ISA. This allows you to benefit from the tax-free environment of the ISA for future gains.
Transfer Shares to a Spouse
Transfer shares to a spouse or civil partner and you can use up both of your CGT allowances and effectively double the tax-free amount you can realise each year. Transfers between spouses are CGT free.
Frequently Asked Questions (FAQ)
How long do I need to hold shares to avoid CGT?
There is no specific time you need to hold shares to avoid CGT. However, holding shares in tax-advantaged accounts like ISAs or SIPPs makes them CGT free. Holding EIS or SEIS shares for at least three years makes them CGT free.
What is the CGT allowance?
The CGT allowance is the amount you can make in profit from selling assets before you pay tax. For 2023/2024 the CGT allowance is £12,300.
Can I avoid CGT by holding shares for a long time?
Holding shares for a long time doesn’t by itself avoid CGT. The tax is applied when you sell the shares but using tax-efficient accounts like ISAs or SIPPs can help you avoid CGT.
How can I minimise CGT on shares?
Minimise CGT by using your annual CGT allowance, tax-efficient accounts like ISAs and SIPPs and the Bed and ISA or transfer shares to a spouse.
Are EIS and SEIS shares CGT free?
EIS and SEIS shares become CGT-free after three years. These schemes offer significant tax reliefs for investing in small and early-stage companies.
Conclusion
Knowing how long you need to hold shares to avoid CGT is key to good tax planning. There is no specific time you need to hold shares to avoid CGT. But using tax-advantaged accounts like ISAs and SIPPs and investing in EIS or SEIS and using your CGT allowance and tax-efficient investment options can reduce your tax bill and increase your returns.
