The Brand Financial Training team provide a refresher on the processes and tax implications of investing in shares.
When buying shares in a company, most investors will be hoping for a return of income in the form of dividends and/or growth in the value of the share which can later be sold for a gain.
To assess the potential for income and growth, as well as the stability and performance of the company, many investors will analyse the company’s accounts and use ratios to help them decide whether to invest or not.
Investors may be interested in one or all of the following:
- Income potential
- Growth valuation
- Profitability
These can be measured using the following ratios:
Dividend yield measures the dividend paid as a percentage of the current share price, allowing potential investors to compare this with other returns that could be earned elsewhere. If a company pays a dividend of 12p per share and the current price of the share is 150p then the dividend yield is 8% (12/150 x 100).
The price earnings ratio (P/E ratio) compares the share price of a company to its earnings per share. It gives an indication of the market’s expectations of future earnings growth potential. If the price of the share is 150p and the earnings per share is 20p then the P/E ratio is 7.5 (150/20).
Return on equity measures a company’s profitability by working out the return generated for shareholders’ total equity. It gives an indication of how efficiently a company is using its investment from its shareholders. Very simply, if profit after tax is £10,000 and the total equity subscribed from investors is £50,000 the return on equity is 20%.
Each of these ratios provides a particular insight into a company’s financial performance and they can be used, together with others, to form a comprehensive analysis.
Remember though it’s important that ratios are considered in the context of the sector the company is operating in and other relevant factors when making informed investment decisions.
Costs of buying and selling shares
Once the decision to buy has been made then costs need to be considered. The costs that are likely to be incurred are as follows:
- Commission – often a flat fee
- Stamp duty reserve tax – on purchases settled through CREST at 0.5%
- Stamp duty – on purchases which are not settled through CREST at 0.5%, rounded up to the nearest £5 on any purchases of more than £1,000
- The Panel on Takeovers and Mergers (PTM) levy – an extra £1 automatically charged on purchases and sales of over £10,000
Income Tax
Any dividend income received that falls within an investor’s personal allowance is not taxable. In addition, all investors are entitled to a dividend allowance of £1,000 in 2023/24, Above this, the Income Tax rates are 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers and 39.35% for additional-rate taxpayers.
Capital Gains Tax (CGT)
CGT on profits made on shares is charged at either 10% or 20%, depending on the tax status of the investor.
However CGT is only charged if total gains, after deduction of any losses, are more than the investors CGT annual exempt amount. In 2023/24 this has been reduced to £6,000 (from £12,300 in 2022/23) and this will fall again to £3,000 from 6 April 2024.
Let’s look at an example:
Maddy invested £20,000 into a portfolio of shares on 1 July 2013. She now wishes to encash the holding, which is worth £52,000. She has made no other disposals for CGT in the current tax year and has no losses to carry forward. What is the gain that is chargeable to CGT?
Remember that stamp duty/stamp duty reserve tax and dealing costs are incidental costs of acquisition and can be deducted when working out the chargeable gain. Any costs incurred when selling shares can also be deducted.
If Maddy is a basic-rate taxpayer she will pay CGT at 10% on the gain. If the gain pushes her into the higher-rates then she will pay CGT at 20%. Depending on the amount of her taxable income, she may pay CGT at both 10% and 20%.
Gains can be reported through the ‘real time’ CGT service; this must be done by the 31 December following the end of the tax year and any CGT must be paid by the 31 January following the end of the tax year. For example, if a gain was made on the 4 of July 2023 this falls in the 2023/24 tax year; the gain would need to be reported by the 31 December 2024 and any CGT would need paying by the 31 January 2025. Alternatively gains can be reported and paid through self-assessment in which case the deadline for both is the 31 January following the end of the tax year.
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