How is tax calculated on investment profit not in an ISA?

JohnRo

reeac wrote: »

Do people agree that using weighted average purchase prices for the shares is appropriate?

You have to work out the cost basis of those shares you sold.

That simply means the sum of what you paid for them when purchased divided by the number of shares in question.

If you are selling a bunch of shares in an particular investment that had different purchase prices then the result will be an average in the sense that the total cost of all the shares dividend by the number of shares being sold is the average cost per share.

If that's the case you need to treat the shares as individual lots and arrive at a total cost number that reflects the reality of what each of those shares cost.

ColdIron

reeac wrote: »

Do people agree that using weighted average purchase prices for the shares is appropriate?

It's not only appropriate, in most cases it's required. Read the link to HMRC

• From 6 April 2008 all shares of the same class, in the same company, are together called a ‘Section 104 holding’. You add together the costs of the shares in this holding: each share in the holding is treated as if acquired at the same average cost.

DennisTenus

Thanks everyone for help

Anyone know if my income figure on the HMRC tax website would also dividends too (if I had some outside an ISA)?

bowlhead99

When doing the weighted average, remember your cost base for a particular set of shares will change each year because you will be adding in New shares to the pool from your dividend reinvestments and then subtracting shares (at the overall running average price) when you do a disposal. Here's a made up worked example.

For example, at the beginning of a year you have 5000 shares in a particular company which had cumulatively cost £40000 (average cost £8 each including fees and stamp duty). Then part way through the year, you receive dividends of £600 which are automatically reinvested in buying another 60 shares because the price at that time including whatever costs and stamp duty is payable is £10 each.

At that point you have spent £40,600 on your pool of 5060 shares, so the average cost price if you were to sell some of them is £40600/5060 or £8.0237 each. But if you don't sell anything then, and then six months later get a final dividend of £750 which is spent on buying another 60 shares (because the prevailing market price including stamp duty and transaction costs has risen to £12.50 per share at that point), you will now have a total pool of 5120 shares and a cost base of £41,350. The average cost at this point is £41350/5120 or £8.076 per share.

Then let's say you want to do a bit of bed and ISAing near the end of the tax year.

The market price by then is £13, so you're going to make proceeds of £13 per share (less transaction costs) and make some gains. You might now decide to sell 1540 shares to realise £20020 of cash ; call it £20000 after selling fees, which can be used to fund your next ISA.

You compare that £20000 with the costs of the shares (£8.076 cost per share x 1540 = £12437 cost of what you're selling), and you get a gain which conveniently fits inside your annual gains exemption.

At that point the pool of shares you're tracking outside the ISA has been reduced from 5120 shares by 1540 shares, to 3580 shares. But they still have a cost of £8.076p each because the act of selling some of them to fund your ISA didn't change your purchase costs *per share* in any way.

You can stop and check the maths: 3580 shares at £8.076 is £28912, which together with the cost of what you sold (£12437 in your last CGT calc) adds up to the £40k original cost and the £600 dividend reinvestment and the £750 dividend reinvestment. But it's important that when you're maintaining running totals, you process everything chronologically and use a decent amount of decimal places down to fractions of pence per share, or you might get big rounding errors.

Then a few months later, you get another dividend, perhaps £500 to reinvest and the process continues....

Maybe that buys you another 40 shares at £12.50. At that point, you know you *had* a running total of 3580 shares costing £8.076 each (total £28912) and you simply need to continue the process to say that if you've now spent another £500 the whole pool of shares now cost £29412; there are now 3620 shares in the pool instead of 3580; so the running cost of those 3620 shares is £20412/3620 or about 8.125 each.

And so the process continues every time there is a new investment or a disposal.

If you wanted to do a bed and ISA you have two ways of looking at it. One is: I need to raise £20k to stuff my ISA, the shares can be sold for market price X each so I will sell £20000 divided by X to raise all the money. The other way is, I want to use up my CGT exemption and not much more, and I know my cost of these shares is running at £8.125 each, so the gain per share is X - 8.125.... how many of these "X minus £8.125 per share" can I do before I run out of annual exemption?

Anyone know if my income figure on the HMRC tax website would also dividends too (if I had some outside an ISA

Not sure I quite follow the question, did you miss a word or two from your sentence?

By figure on the tax website: You mean the estimated income figure that HMRC are tracking from your employer's monthly PAYE returns and their estimate of the bank interest you are receiving based on what came through on previous years?

They will rely on you to tell them what dividends you got, because the dividend payers don't tell them in real time and for all HMRC know, you might change your holdings on a daily basis.