How are shares taxed?

When are shares likely to be taxed?

Shares can potentially be taxed at five points: when you buy them, when they deliver an income, when you come to sell them, when you give them away and when you pass them on in your estate.

In each of these situations, a different tax could be applied.

• Stamp duty may be charged when you buy shares
• Dividend tax may be applied on share income
• Capital gains tax could be payable when you sell or give away your shares

However, whether or not you need to pay tax on your shares will depend on how you purchase and hold them, and the size of your returns.

Let’s look at each of the taxes in turn.

Stamp duty 

We normally associate stamp duty with buying property, but it can also apply when you buy shares.

Stamp duty reserve tax is charged at a rate of 0.5% of the price you pay for your shares and it applies on shares purchased electronically. Stamp duty is also charged when you buy shares with a paper-based stock transfer form to move share ownership from one person to another, but only if the transaction is worth more than £1,000.

This means that if you bought £5,000 worth of shares you’d pay £25. For electronic transactions, costs are rounded to the nearest penny. Paper transactions are rounded to the nearest £5.

However, stamp duty doesn’t apply to all share purchases.

Importantly, you won’t pay stamp duty if you are buying:

• shares in a mutual fund such as a unit trust or open-ended investment company (OEIC) from a fund manager
• shares in an exchange traded fund (ETF)
• new issue shares
• foreign shares outside the UK (but other taxes may be applied).

You will pay stamp duty if you are buying:

• shares in an existing UK company
• an option to buy shares
• an interest in shares
• shares in foreign companies that have a share register in the UK
• rights arising from shares, for example when new shares are issued.

You do not have to worry about how or when to pay stamp duty on shares, it should be included in the cost of purchase by your broker.

Dividend tax

When you own shares, either directly or within a collective investment fund, you may receive dividend payments – a share of the company profits that’s distributed to shareholders.

This income is taxable, but you can earn a certain amount before dividend tax is charged. You won’t pay any dividend tax if the income falls within your Personal Allowance (the overall amount you can earn each year before you pay tax) and you have an annual dividend allowance each year.

Currently the dividend allowance is £500 a year (down from £1,000 in the 2023/24 tax year).

When dividend tax is charged, the rate you pay will depend on the rate of income tax you pay.

Source: Gov.uk

Take a dividend income of £5,000 as an example. With a current £500 allowance only £4,500 of dividends would be taxable.

It’s also important to note that your dividend income will be added to your overall income for the year, meaning they could, potentially, push you into a higher rate tax band.

You will need to declare your dividend income to HMRC. If it is less than £10,000 a year you can include it in your self-assessment tax return if you do one, or you can contact HMRC and either pay it directly or request a new tax code. This will mean that the tax is deducted from your earnings or pension income.

If you have dividend income over £10,000 a year, you will need to complete a tax return. 

Working out capital gains

Your gain is usually the difference between what you paid for your shares and what you sold them for. 

If you give away shares to someone apart from your spouse or civil partner, or sell them for less than they are worth, you may trigger a capital gain. Your gain will be the difference between the market value and the original purchase price.

Working out the purchase price can be a bit tricky if you have acquired them over a period of time and at different prices.

Normally it can be done by calculating the average price of your shares and subtracting that from the sale proceeds.  Different rules apply however for any shares that were purchased in the last 30 days.

HMRC has a help sheet for guidance.

You will need to declare your capital gains. This can be done via a self-assessment tax return, or you can report them to HMRC using its real-time capital gains tax service.

Read more: Our guide to Capital Gains Tax

What happens when I inherit shares?

When you inherit shares you shouldn’t face an immediate income or capital gains tax bill. However, depending on the value of the deceased’s estate, inheritance tax may have been deducted from it.

However, depending on how those shares are held, you may have to start paying tax on dividends. You may also become liable for capital gains tax when you come to sell or dispose of them.

What happens when you give away shares?

When you give away shares you or the recipient may have to pay the following taxes:

1. Capital gains tax – giving away shares is treated in the same way as selling shares for capital gains tax purposes. The market value at the time of the gift is used instead of the sale price to work out the gain.
2. Inheritance tax – shares which are given away within seven years of death may be included as part of someone’s taxable estate for inheritance tax.

How to pay less tax on shares

Tax on shares is only set to increase over the coming years, with two drastic and successive reductions to the capital gains and dividend tax allowances in April 2023 and 2024.

However, the good news is there are plenty of ways to reduce your tax bill or avoid it altogether.

1. Use a tax-free wrapper: The easiest and most straightforward way to legally avoid paying tax on your investments is to hold them in a tax-free wrapper like an ISA or pension. This will shelter your shares from dividend and capital gains tax. Each year you can pay £20,000 into an ISA and 100% of your earnings (up to £60,000) into a pension. By taking advantage of your tax-free allowances each year you can shelter a sizeable investment portfolio from tax over time. If you have shares held outside an ISA or pension you can’t transfer them over. However, you can sell them and immediately repurchase them within your ISA or pension – this process is called Bed and ISA or Bed and SIPP. You just need to make sure that the amount you sell doesn’t exceed the CGT allowance otherwise you might trigger a CGT liability.
2. Team up with your spouse: Married couples and civil partners will be able to double their allowances by making use of each individual’s allowance. There may also be opportunities to pay less tax by transferring assets between married couples or those in a civil partnership (CGT won’t be payable when you give assets to your spouse). Even if tax can’t be avoided altogether there may still be opportunities to save if one-half of the couple pays a lower rate of tax than the other.
3. Deduct your losses: When you are calculating any capital gains it’s also important to know that you can deduct losses you’ve incurred on other assets. This will reduce your gain for tax purposes and therefore reduce the overall amount of tax you pay.

For more ideas about how to pay less tax on shares read our article on how to reduce your capital gains tax bill.