If you use the normal (non-ISA) Freetrade account to buy the same ETF every month, then a few years down the line you sell enough of it to get a certain amount of cash.
How would you go about working out your capital gains from that?
If you only had to sell less than you bought that month, the gains would be what the ETF gained that month, right?
If you had to sell multiple months worth of the ETF, do you go back month by month and calculate the gains on that month’s worth?
This seems like it might be really difficult to get right. Is, or will there be, a Freetrade feature to make it easy?
(I won’t be using the ISA personally; I’d get a JISA if Freetrade offered one, and my wife will get the ISA for our shared investments. I doubt my personal investments are going to exceed the capital gains allowance, so I can save the ISA fee for now.)
Ah, so basically you need to know:
How many shares of the ETF you have in total.
How much you spent on those shares in total.
How many shares you need to sell to get the amount you want.
I’ve not bought or sold anything in Freetrade yet, so can someone tell me if these 3 things are easy to find out?
If all your calculated gains over the year are < £11700 ( current rules ) then your liability will be 0. Any losses can be offset - I’m still holding onto virtually worthless RBS shares for this reason…
Capitals Gains is worked out when you sell. So if you sell this tax year, you will pay tax on it (gains/profit) this tax year. It makes no difference when you bought the shares.
It’s the main reason you should pretty much always go down the ISA route (personally).
It’s worked out when you sell. So if you bought £10,000 worth of shares. You’d need to sell them for £22,000 to have to declare any gains as you’d then be over the £11,700 capital gains tax allowance
Sure, my question was more about “how do you work out what you bought all the shares (that you just sold) for”, if you’ve been buying them at different prices in different amounts over many buys and many years.
HMRC just wants you to take an average price, which is easy to calculate if you have the figures in my numbered list above; does Freetrade provide those figures easily?
Oh I see sorry I misread that. Yes Freetrade shows you an average price when you click on the shares in your portfolio. As you can see I have 18 shares in this ETF. Current value is £385. Avg. price per share £20.61 . This is the average price that I purchased the shares at over multiple ‘buys’.
Anyone good with spreadsheets? I’m running some numbers trying to do some theoretical calculations for the future. I have a column that starts with a certain amount invested in to a GIA. Every row is another year, and every year I have the amount increasing by 7%, and then reducing by £20,000 (to simulate transfer to an ISA). So far, so easy.
For any given year, how do I estimate the Capital Gains tax I’d pay if I sold everything in the GIA at that point in time? I can’t get my head around the right formulae to use.
I am not quite sure what the spreadsheet looks like based on your description.
Do you have a large amount currently in the GIA which you want to gradually move to an ISA at a rate of £20k per annum with consideration for its 7% annual growth in your GIA?
My formulae for each row after the first in this column is: MAX((B2×(1+(7÷100)))−20000,0)
Where B2 is value in the row above.
My attempt at what I want, in the next column, is:
B2×(7÷100)×(1−(20÷100))+($B$2−((A3−2019)×20000))
Where B2 is the value in the row above of the previous column, $B$2 is always the initial amount of the GIA, and A3 is the year of that row. But I don’t feel like this is correct.
(Don’t worry about CGT allowance, it’s an unnecessary complication)
So, unless I misunderstood what exactly you are after, your function seems to be a bit overcomplicated
I will take £100,000 as a hypothetical value of your GIA which you want to gradually move to an ISA. The table looks something like this:
Year
GIA
GIA (post 7% growth and £20k reduction thereafter)
1
£100,000
£87,000
2
£87,000
£73,090
3
£73,090
£58,206
4
£58,206
£42,281
5
£42,281
£25,240
In case of the fifth year, you would be liable for £2,708 CGT (assuming you are in the higher rate income tax bracket).
The actual content of the table and the CGT calculation is the following:
Year
GIA
GIA (post 7% growth and £20k reduction)
1
Initial Capital
=B2*1.07-20000
2
=C2
=B3*1.07-20000
3
=C3
=B4*1.07-20000
4
=C4
=B5*1.07-20000
5
=C5
=B6*1.07-20000
CGT calculation =(C6-11700)*0.2
You can add additional years, as well as change you initial GIA amount in B2, the CGT calculation will need to be changed accordingly (C6 to C* [depending on how many years you have in total).
That is all assuming the perfect world with a flat 7% growth, a £20k capital reduction every 4th of April and CGT rate/allowance remaining the same as they are now.
Thanks. So you’ve calculated the CGT as 20% of the full contents of the GIA for the desired year (after gains and reduction) - allowance?
I’m not able to convince myself that the full contents of the GIA at that point in time is the taxable amount. I was thinking there would have to be some more difficult determination of what the gains would be since year 1, and it would be 20% of that?
(Also, the reduction by £20k each year uses some of my allowance, including in the year we’re interested in, hence wanting to ignore allowance as a complication that doesn’t matter for my purposes.)
I think it helps to think of the share price at the start being £1, so in the example the GIA has 100,000 shares, worth £100,000.
After the first year the share price goes up by 7%. We then sell enough shares to generate £20,000.
This same thing happens every year.
At some given year, the goal is to figure out the current share price, and how many shares we have left.
From that we can work out our capital gains because we have the original share price, the new price, and how many shares we’re selling.
Yep, it comes separately to your income tax and regardless of your capital gains, it is always a flat 20% rate (28% for residential property).
The whole shebang is taxable. You can keep accumulating your equity for 50 years straight but once you crystallise it, everything is taxable less the allowance. So, a rather simple and effective way which is convenient for both people and HMRC.
You are absolutely right, I completely forgot that
Is that still relevant if you know the entire sum is taxed when you sell, regardless of for how long you have held it for?
Yes the CGT would only be on the profit I think. If 20k worth was sold each year I would say that the 25k left would equate to approx. 18k shares so 7k profit ( the remainder have been sold to ISAs over the years with a current share price of £1.40 with 7% growth )
Disclaimer : I’m not an accountant if the above proves to be nonsense
No, I’m fairly certain you’re wrong about that. The clue is in the name: capital gains tax. You’re only taxed on what you gained. See the original discussion above for how you calculate it normally.
Anyway, I ended up doing it by having a column A for share price, starting at £1, increasing each year by 7 percent. Then I have a column B for shares, starting at my amount to invest. Column C is current value: A*B.
For row 2 onward, B is calculated as FLOOR(B’−(20000÷A),1), where B’ is the value of B in the previous row. That tells us how many shares we have left after selling £20k worth.
Finally column D is the value if all shares sold, after CGT (ignoring allowance): (C−C!)×(1−20÷100)+C!, where C! is the first value in column C. This is taking 20% off the difference between current value and original value (profit after tax) and adding it to the original value.
I think that’s correct, but now I need to account for allowance for every £20k sale, in case any are over the allowance, requiring the sale of more shares to reach £20k net…
Nope, got it wrong. I think it should actually be: C−(C-B)×(20÷100)
C-B represents the profit, since B, the current number of shares, also happens to be the price we originally paid for that many shares. 20% of that is the tax we must pay, so we deduct that from the current value of the GIA to get our net profit.
Anyone want to check everything I did to make sure it’s valid?
=(C6-11700)*0.2