Capital Gains Tax on Shares

When you sell shares outside tax-advantaged accounts like ISAs, you may need to pay Capital Gains Tax on any profit. The rules for calculating your gain are more complex than for other assets, because shares require special "matching rules" to determine which shares you've sold and at what cost, particularly if you've bought the same shares at different times.

When Capital Gains Tax applies to shares

You pay Capital Gains Tax when you dispose of shares or securities. A disposal includes selling shares for cash, giving them away, transferring them to someone else (except your spouse or civil partner), or exchanging them in certain corporate actions.

Shares held in ISAs and pensions are exempt from Capital Gains Tax. The rules in this article apply to shares held outside these wrappers.

Why shares have special rules

Shares present a unique challenge for Capital Gains Tax. If you buy shares in the same company at different times and prices, and then sell some of them, you need to know which specific shares you've sold to calculate your gain or loss correctly. HMRC uses "matching rules" to determine this.

Share matching rules

When you sell shares, you must match them against shares you acquired in a specific order:

Same-day acquisitions: First, match the shares sold against any shares you bought in the same company on the same day.

Bed and breakfasting: Next, match against shares you bought within 30 days after the sale. This rule prevents you from selling shares to crystallise a loss, then immediately buying them back to maintain your holding. If you sell shares and buy the same shares within 30 days, the repurchase is matched to the sale for Capital Gains Tax purposes.

Section 104 holding: After matching same-day and 30-day purchases, match the remaining shares sold against your "Section 104 holding" (also called the "share pool"). This is a pooled holding of all the remaining shares of the same class in the same company. The Section 104 holding maintains a running total of the number of shares and their total cost (including acquisition costs like broker fees).

Calculating gains from a Section 104 holding

Your Section 104 holding tracks both the total number of shares you own and their total allowable cost. When you sell shares from this pool, you calculate the cost attributable to the shares sold by using this formula:

Cost of shares sold = (Number of shares sold ÷ Total shares in pool) × Total pool cost

For example, if your Section 104 holding contains 1,000 shares with a total cost of £5,000, and you sell 300 shares for £2,400, the allowable cost is (300 ÷ 1,000) × £5,000 = £1,500. Your gain is £2,400 - £1,500 = £900.

Each time you buy more shares of the same class in the same company, you add both the number of shares and their cost (including purchase costs) to your Section 104 holding. When you sell shares, you reduce both the number and the cost proportionately.

Share reorganisations and company takeovers

Share reorganisations and takeovers can complicate your Capital Gains Tax position. These corporate events include:

• Bonus issues (free shares)
• Rights issues (opportunity to buy new shares)
• Stock dividends (shares instead of cash dividends)
• Company takeovers where you receive shares in the acquiring company
• Demergers (when a company splits into separate entities)
• Conversion of shares from one class to another

In most reorganisations, you don't pay Capital Gains Tax at the time of the event. Instead, the new shares or securities you receive "take the place" of your original shares. The cost and acquisition date of your original shares carry forward to the new holding. This is called "reorganisation relief."

For takeovers where you receive shares in the acquiring company in exchange for your original shares, the same principle applies. You don't have a disposal for Capital Gains Tax purposes at that time. Your new shares inherit the cost and acquisition date of your original shares.

However, if you receive cash as part of a takeover or reorganisation, this will be a disposal and you'll need to calculate any gain or loss at that point.

Stock dividends

If you choose to receive shares instead of a cash dividend (a stock dividend), you must usually add these shares to your Section 104 holding. The acquisition cost is either:

• The cash dividend you gave up, or
• The market value of the shares received

The stock dividend may also be taxable as income for the year you receive it, depending on dividend tax rules.

Capital Gains Tax rates and allowances for 2025/26

For the 2025/26 tax year, you have an annual Capital Gains Tax allowance. You only pay tax on gains above this threshold.

Capital Gains Tax rates on shares depend on your Income Tax band:

• Basic rate taxpayers: 10% on gains from shares
• Higher and additional rate taxpayers: 20% on gains from shares

If your total income plus capital gains push you from the basic rate into the higher rate band, you'll pay 10% on the portion within the basic rate band and 20% on the rest.

Reporting and paying Capital Gains Tax

You must report capital gains from shares on your Self Assessment tax return if your total proceeds (sale value) from all assets exceed four times the annual allowance, or if you have tax to pay.

Even if you've made a loss, you should report it on your tax return. Capital losses can be carried forward indefinitely and set against future capital gains.

You need to keep records of all share transactions, including purchase dates, costs, sale dates, and proceeds. For Section 104 holdings, maintain a running record of the pool as it changes over time.

Sources

• Share reorganisations and company takeovers (HS285)
• Shares and Capital Gains Tax (HS284)

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.