When you sell something for more than you bought it for, the profit you make is called a capital gain. In the UK, you might have to pay tax on that gain. This is known as Capital Gains Tax, or CGT.

Think of it like this: you buy a rare collectible for £100. A few years later, its value shoots up, and you sell it for £500. Your capital gain is £400. CGT is the tax applied to that £400 profit.

This tax applies to the disposal of various 'assets'. An asset can be anything from a second home or a piece of art to company shares. When you 'dispose' of an asset, it usually means you've sold it, but it can also include giving it away, swapping it, or getting compensation for it, like an insurance payout.

This article focuses specifically on how CGT works when you sell shares.

The first step is to figure out the size of your gain. The basic idea is simple: it's the selling price minus the purchase price. However, you can also deduct certain costs associated with buying and selling the shares. These typically include broker fees or stamp duty.

The calculation looks like this:

Let's walk through an example. Say you bought shares in a company for £15,000 and paid a £100 broker fee. A few years later, you sell those shares for £40,000, paying another £100 broker fee.

First, calculate your total cost basis. This is the original price plus any buying fees.

£15,000 (purchase price) + £100 (buying fee) = £15,100

Next, determine your proceeds. This is the selling price minus any selling fees.

£40,000 (selling price) - £100 (selling fee) = £39,900

Finally, calculate your gain.

£39,900 (proceeds) - £15,100 (cost basis) = £24,800

Your capital gain is £24,800. This is the figure you'll use to work out your tax, but you don't necessarily pay tax on the whole amount.

Everyone gets a tax-free allowance for capital gains each year. It’s called the Annual Exempt Amount. You only pay CGT on the portion of your gains that exceeds this allowance.

This allowance changes over time. For the 2023-2024 tax year, the allowance was £6,000. It's important to check the current rate for the tax year you're selling in, as these figures are set by the government and can be adjusted in the budget.

Let's go back to our example. Your total gain was £24,800. If the annual allowance is £6,000, your taxable gain is:

£24,800 (total gain) - £6,000 (annual allowance) = £18,800

You will only pay CGT on this £18,800.

The rate of CGT you pay depends on your income tax band. Your taxable capital gains are added on top of your regular income to determine which CGT rate applies.

For the 2023-2024 tax year, the rates for gains from shares were:

• 10% for basic rate taxpayers
• 20% for higher and additional rate taxpayers

Let's say your annual salary is £40,000, which puts you in the basic rate income tax band. The threshold to become a higher rate taxpayer is £50,270. You have a buffer of £10,270 before your income tips into the higher rate.

Your taxable gain is £18,800. The first £10,270 of this gain will be taxed at the basic rate of 10%. The remaining amount (£18,800 - £10,270 = £8,530) is pushed into the higher rate band and will be taxed at 20%.

Your CGT bill would be:

• £10,270 at 10% = £1,027
• £8,530 at 20% = £1,706

Total CGT to pay = £1,027 + £1,706 = £2,733.

If your income was already in the higher rate band, your entire taxable gain of £18,800 would be taxed at 20%.

£18,800 at 20% = £3,760

Understanding these basic rules helps you anticipate your tax liability after selling shares. It’s the first step in managing your windfall effectively.