Investors can potentially make significant savings on their tax return by carefully monitoring their capital gains position. If you dont fully understand the complexity of the Inland Revenue's capital gains calculation rules for share trades then it can be quite a surprise to discover how much of an effect a single careless buy or sell can have on your tax bill. The main cause of this confusion is the 30-day rule which forces any sell trade to be matched firstly, with a buy on the same day, and then with any buys in the PROCEEDING 30 days. Only after these options have been examined will buys PRECEDING the date of the sell be taken into account.
How much tax am I paying on this trade?
If you have made several, or even dozens, of trades in the same stock then it can take ages trying to unravel your tax year gain, or loss, for tax purposes ie which sell matches up with which buy? In particular if you arent keeping track then you wont be sure whether you're effectively paying tax at, for example, 20% or 40% on your profit. If you are unsure about selling a position the effective tax rate on any profit may sway the issue.
Dont get caught out by the 30-day rule
On the 3rd May 2005 she buys 10,000 shares in AAA at £1.20
On the 10th Feb 2006 she sells 10,000 shares in AAA at £2.00
Regina has made a capital gain for the 05-06 tax year of £8,000 (lets ignore tax and charges for simplicity). She knows this is below the capital gains exemption of £8,800 and therefore she will have no tax to pay. However 2 weeks later Regina notices the AAA share price has dropped to £1.90 and sensing a bargain buys 10,000 shares. Regina, unaware of the 30 day rule, doesnt realise the 10,000 shares she sold on 10 Feb now matches up with this purchase and leaves her with a capital loss of £1,000. Its only after the tax year end does she realise her mistake and that she has not used her 05-06 tax exemption and faces a hefty tax bill if she sells all her AAA shares in the 06-07 tax year. This is not what she intended. (Note Regina can book the £1,000 capital loss and carry it forward for a maxm of 5 years)