There are plenty of places I’d rather not be at two o’clock in the morning. Peckham High Street, for example, or making the pizza run in downturn Kabul, Afghanistan.
But in my home office filing through old share trades to calculate my capital gains tax loss for the taxman is right up there with the war zones.
Here in the UK, you have to declare details of your capital gains and losses from share trading over the past financial year if:
- You made more than your allowance (currently £9,600) in capital gains in the year (I wish!)
- You made disposals of 4x that allowance – now £38,400 (I wish I hadn’t)
I sold quite a few holdings in the tax year to 5th April 2009, recycling the proceeds into what I guessed judged were safer harbors during the long bear market, and also funding last years’ ISA allowance.
As you’d expect in 2008, this realised capital losses. Even if wasn’t bound by law to detail them, I’d do so anyway to carry the losses forward to set against capital gains tax in future years.
For example, I sold my remaining bank shares last summer, which looking at the prices I got for them seems a lot cleverer/luckier in retrospect than it felt at the time.
Selling for between £2 and £3 for Lloyds shares when I got cold feet about the merger with HBOS was soul-destroying given they’d hit £6 before, but considering the shares fell to near 30p within 6 months, I thank again whatever angel was sat on my shoulder that day!
(Incidentally, by the start of 2009 I’d bought back into banks with HSBC and Standard Chartered, and I more recently bought shares in Lloyds Banking Group, paying 74p).
Looking at other trades is flat-out painful; positions built up over years sold at less than cost, down from twice that level in 2007. (Remember, I generally didn’t take my money out of the market, save what I withdrew in 2007/2008. Selling low and missing the upturn is a classic bear market error; instead, the money my sales realised were recycled into other shares, trackers and other pooled funds. I was overall a net buyer throughout the bear market).
The tax reckoning process also reminds me that I really need to keep better records if I’m to properly calculate how much my ventures in stock-picking are really costing me (remember, it’s better to use a tracker folks!)
There’s pain, and then there’s a sharebuilder
What makes the CGT exercise even more tedious is that most of the shares I sold are located in a so-called sharebuilder account that was historically my high-yield portfolio.
Sharebuilder accounts seem a great idea, because they enable you to buy small bundles of shares at a much reduced dealing cost (£1.50 in my case).
You can even set them to automatically re-invest dividends, which at the time I was doing it incurred no commission fees at all.
The trouble comes when you have to calculate a taxable gain or loss on disposal. Then the sharebuilder is truly an instrument of torture.
I had some positions built up from half a dozen more purchases or more, including reinvested dividends.
This means you have to tediously go through and collect all the transactions to calculate your total purchase costs (another argument for keeping better records).
You also frequently end up buying fractions of shares. This seems a lot less cool at two in the morning when you’re staring at something like:
BT.A 23-Jan-04 BUY 269.3072 184.18 5-Mar-04 BUY 274.524021 180.68 20-Aug-04 BUY 136.464485 181.19 7-Sep-04 BUY 15.566294 184.18 14-Nov-04 BUY 249.38911 198.89 29-Nov-04 BUY 253.557919 195.62 8-Feb-05 BUY 22.261045 208.93 27-Oct-05 BUY 219.669073 203.67
Believe it or not, it gets even worse.
The ultimate nightmare is when some shares have been bought and sold multiple times over say a five-year period. In these circumstances, you have to work out how a pool of expenditure on the shares changes over time, in order to properly work out the capital gains or losses due.
Frequent trading is bad for performance we know, but it turns out it’s also bad for your sleep habits!
In short, paperwork like this is pretty fiddly and boring and if you’re lucky you’ll never have to do it. (If you do and you’re stuck, check out the UK government page on tax arising from share transactions for more details.)
Alternatively, you can avoid relying on luck by being sensible, as I’ll now explain.
ISAs and SIPPS save this hassle
Being free of this paperwork is another great argument for using a tax-exempt trading account to hold your shares.
Here in the UK we can use ISAs (Individual Savings Accounts) or a SIPPs (Self-Invested Personal Pensions) to shelter our holdings free from income and capital gains tax – and also from all any paperwork.
Other countries have similar wrappers, and they are all sold chiefly on the benefits of saving on tax.
These tax advantages are worth having. But the thing is, many people will take a few years to reach the stage where their investment will be generating serious dividend income. Or else they’ll invest in a tracker or other fund and allow it to grow without selling it.
They therefore wonder why they should bother setting up an ISA, especially if they have to pay a fee for it, since to they’re not getting much income or seeing capital gains in the early days.
But eventually through regular saving and reinvesting, dividend income will grow to be meaningful, and when it does you’ll curse the tax you pay on your hard-earned investments.
Equally, unrealized capital gains are great right up until you want to realize them and discover you owe the taxman a big slug of two decades of growth.
Yet even if tax benefits take a while to show, avoiding paperwork is a bonus you get straight away with an ISA or SIPP.
You aren’t expected to tell the taxman what you hold in an ISA – he really doesn’t want to know. You can make gains and losses in your own perfect little ISA kingdom, free of the toll of the taxman.
I have about half my portfolio in ISAs, and no realistic chance of ever sheltering all my money within them, unless I stop earning and the markets stay flat for years.
I started using tax shelters too late, and so will forever be playing catch up to move my money into them.
If you’ve only just started investing, you can avoid this sorry fate. Or, if you’re an old hand, bite the bullet and start sheltering your funds from tax.
Some self-select ISA providers don’t even charge an annual fee.
It’s back to Excel for me. I estimate I’ve spent about 10 hours digging up trade details and working out my gains and losses on disposals so far.
Whoever said share trading was glamorous? 
{ 4 comments… read them below or add one }
Have you tried opening spreadbets on your shares instead of buying them? No paperwork with spreadbets – and no taxes. Have to watch what youre doing with margin calls and funding and easy to go mad and blow up of course.
@OldPro – I have used a spread betting account before, but only as a dabble. I am familiar with the risks and the theory of using it as a conventional portfolio (i.e. use small positions with a lot of cash in an instant access account to fund the portfolio, so you’re not actually leverage). I’ll try and write a post sometime.
The big problem I found was that it was almost impossible to resist trading due to the design of the platform, something I talked about here:
http://monevator.com/2008/08/14/how-a-boring-broker-will-make-you-richer/
Thanks for the suggestion though.
Regarding the original suggestion, I’ve now found another tedious element to slow me down – company re-organisations, which complicate working out the price per share of remaining holdings. *sigh*
Hi,
just a quick note regarding dividend income – for both ISAs and SIPPs the dividend tax credit of 10 per cent is not reclaimable. Therefore, for basic rate tax payers the only additional benefit for wrapping in an ISA is is avoidance of any CGT liability.
However, holding fixed interest investments is worth doing in ISAs as they are taxed as interest and therefore, the income is completely tax free.
Of course, you don’t want to let the “tax tail wag the investment dog” but this is worth bearing in mind if you’ve got investments in ISAs/SIPPs as well as directly held.
If you’ve got any OEICs/UTs opt for the accumulation units version when you can as they are slightly more efficient for CGT (when not held in an ISA). Naturally, if you’re looking for natural income than this won’t be an option.
Thanks for your comment Thomas.
Incidentally, I actually think the 10% tax credit is a bit of a red herring for today’s UK investors, since it’s notional and not reclaimable as such anywhere as I understand it (certainly for anyone with income above the personal allowance?) and hasn’t been for years.
For private investors outside of an ISA, it boils down to:
lower rate income tax bracket – no further tax on cash dividends to pay
higher rate tax bracket – 25% tax to pay on their cash dividends.
(Ignoring the new temporary special rate for the super high earners).
Agree that cash/bond income is tax-advantaged in an ISA, and so for basic rate tax payers who won’t pay tax on dividend income anyway and who have bonds as well as equities, the bonds should therefore go in the ISA first. (Though as I said in my post, I’d argue there are paperwork and tax-invisibility benefits to keeping shares in ISAs beyond the monetary advantages.