CGT issues in relation to shares

[nelly123]

Hi all,

I am interested in trying my hand at direct share investments. I feel I have a fairly good knowledge of business/economies etc as I have always watched business news & read a lot of papers/articles in this regard. However, I am trying to learn about the tax issues relating to the sale of shares as I am a PAYE worker and therefore never had to submit tax returns before.
I have read some of the posts about CGT here & the general consensus seems to be that CGT can be quite complex. Therefore, I have a few questions in this regard please:

1. How do most stock investors (especially novices) deal with CGT issues when they first start out?
Do most investors use tax advisors for dealing with CGT/dividends etc? I have looked at the CGT booklet from revenue & the CGT return forms but cannot really understand them.
2. Do most individuals/investors make their own CGT payments and complete the CGT return forms themselves or do they use tax advisors/accountants to carry out the process on their behalf?
3. Will the tax advisor just give advice or will they effectively sort out all your tax issues relating to your shares without you needing to understand all the jargon/complexities?
4. CGT appears to become even more complex when you buy more shares of the same stock, but at different times and in different amounts. Assuming I only sold a certain amount of those shares, at different times, how are all these factors considered in the calculation of CGT?
In essence, would most people use a tax advisor in these cases?

My main concern relates to the fact that I really want to become an investor in shares but the tax issues are somewhat of a stumbling block and I am sure others have been in this situation before. How does one learn to deal with the tax issues? I am sure there are very good investors who are not particularly good with tax matters, just as there are very good business owners who are not adept with taxes?
Any advice would be very much appreciated. Thank you in advance.

 

[ClubMan]

I have looked at the CGT booklet from revenue & the CGT return forms but cannot really understand them.

If you don't understand the summary guides then you should get independent advice.

2. Do most individuals/investors make their own CGT payments and complete the CGT return forms themselves or do they use tax advisors/accountants to carry out the process on their behalf?

As above.

3. Will the tax advisor just give advice or will they effectively sort out all your tax issues relating to your shares without you needing to understand all the jargon/complexities?

Depends on what basis you engage them I suppose? For example some people may prepare their own returns and just get an advisor to review/correct them while others will leave everything to the advisor.

4. CGT appears to become even more complex when you buy more shares of the same stock, but at different times and in different amounts. Assuming I only sold a certain amount of those shares, at different times, how are all these factors considered in the calculation of CGT?

The rules applicable are summarised in the Revenue guides (e.g. FIFO rules etc.). It's not really that difficult but you need to keep close tabs on all of the information. What can get difficult is something like the eircom/eircell2000/Valentia/Vodafone etc. situation with share splits and swaps etc.

My main concern relates to the fact that I really want to become an investor in shares but the tax issues are somewhat of a stumbling block and I am sure others have been in this situation before. How does one learn to deal with the tax issues?

If you are serious about investing directly in shares though you really should spend some time understanding the tax issues yourself as tax treatment is a key issue in any investment. To do this you need to at least understand the Revenue summary guides and possibly even more than these (e.g. Tax Briefings).

I am sure there are very good investors who are not particularly good with tax matters, just as there are very good business owners who are not adept with taxes?

Yes - best to get recommendations on who to deal with as with any service provider.

 

[nelly123]

Thank you ClubMan for your advice, which is very much appreciated. I know some of my questions may seem simple to yourself or others but we all have to start somewhere & I just want to learn, even though I may feel awkward about asking certain questions which should seem obvious.
I have a few further queries now please:

- While looking up "citizensinformation.ie" in order to read their explanation of CGT, it states that a PAYE employee should fill out a CGT return via "Form 12", as opposed to the "Form CGT". But this "Form 12" contains requests for lots of other tax considerations, with CGT comprising only a small section on the form. So, do you just fill out the CGT section and leave the rest blank or do you fill out all information on the form?

- Why would you need to fill out entire form, such as income tax section etc, seeing as employer does this for me already & surely a CGT return is treated separately to your regular employment tax?
- If required to fill out entire "Form 12" including income tax etc, would this effect my monthly pay from my employer in any way?
- Do CGT returns in general effect your regular monthly pay from employer or are both treated separately?
"Form CGT" seems more relevant as it is specifically for CGT returns, but the above website advises to complete "Form 12".
So, which is the correct form to use?

Again, any advice would be great. Thank you.

 

[ClubMan]

- While looking up "citizensinformation.ie" in order to read their explanation of CGT, it states that a PAYE employee should fill out a CGT return via "Form 12", as opposed to the "Form CGT". But this "Form 12" contains requests for lots of other tax considerations, with CGT comprising only a small section on the form. So, do you just fill out the CGT section and leave the rest blank or do you fill out all information on the form?

For what it's worth I did CGT returns in the past without fulling in a Form 12 in part or full.

- Why would you need to fill out entire form, such as income tax section etc, seeing as employer does this for me already & surely a CGT return is treated separately to your regular employment tax?

Don't assume that your employer necessarily gets things correct in this context. You need to keep tabs on your own tax affairs, check for errors
and correct them by contacting Revenue whether it be via a Form 12, some other form or by just writing to them (which is my preferred option if there is no obvious form to use).

- If required to fill out entire "Form 12" including income tax etc, would this effect my monthly pay from my employer in any way?

If your tax affairs are not already up to date then your tax credits could get adjusted (up or down) as a result of filing the updated info.

Do CGT returns in general effect your regular monthly pay from employer or are both treated separately?

No - CGT and income tax are totally separate. Remember that dividend income from shares is assessable for income tax though.

"Form CGT" seems more relevant as it is specifically for CGT returns, but the above website advises to complete "Form 12".
So, which is the correct form to use?

I would say the CGT form but if in doubt get professional advice.

 

[nelly123]

Thank you once again ClubMan for taking the time to explain these issues. Just a few further queries:

- If your annual gain amounts to less than the 1,270 euro exemption, do you still need to inform Revenue that you made a gain and submit a CGT return, even though the tax liability should be zero?

- Does the CGT return form due by 31st October (eg 2008) in the year following the disposal of shares, cover all disposals in the previous year (eg 2007) from both tax periods (January -> September) & (October -> December), or do you fill out 2 separate returns, 1 for each period? I know the actual CGT payments are split into 2 separate periods, the first being due for 31st October for disposals made between January & September of the same year and the second being for 31st January the following year for disposals made between October & December of previous year.

- As you have mentioned, dividends are subject to income tax at the marginal rate. Do I pay and file an income tax return after each dividend received or just annually, adding all dividend payments together?

- If dividends are reinvested into buying more shares, do I need to inform Revenue about these dividends, as their value was not realised by me as such as they were reinvested, ie. are they still subject to income tax despite the fact they are reinvested and I don't receive any payment until the shares are sold?

- What tax issues arise in the event of receiving either a bonus issue or a rights issue of shares and how are these issues resolved?

Any advice is much appreciated. Thank you again.

 

[ClubMan]

- If your annual gain amounts to less than the 1,270 euro exemption, do you still need to inform Revenue that you made a gain and submit a CGT return, even though the tax liability should be zero?

I'm not sure but I think so. And if you make a loss I think you need to declare this so you can offset it against subsequent gains at any point in the future.

- Does the CGT return form due by 31st October (eg 2008) in the year following the disposal of shares, cover all disposals in the previous year (eg 2007) from both tax periods (January -> September) & (October -> December), or do you fill out 2 separate returns, 1 for each period? I know the actual CGT payments are split into 2 separate periods, the first being due for 31st October for disposals made between January & September of the same year and the second being for 31st January the following year for disposals made between October & December of previous year.

Sorry - I don't know the ins and outs of the filings and payment dates. If you can't get this information from Revenue then you should get professional advice.

- As you have mentioned, dividends are subject to income tax at the marginal rate. Do I pay and file an income tax return after each dividend received or just annually, adding all dividend payments together?

Again I'm not sure. Annually I think.

- If dividends are reinvested into buying more shares, do I need to inform Revenue about these dividends

Yes - they are still assessable for income tax.

Personally I find dealing with dividend income tax and CGT too much hassle so prefer to simplify matters by investing indirectly in unit linked funds and the like.

 

[nelly123]

Thanks again Clubman. I have some further questions which hopefully either yourself or someone reading can answer:

- If I use a tax advisor for all issues dealing with shares (CGT/dividends etc), how does the system and fee structure operate?
For example, if I bought 1,000 shares of stock X @ 1euro each => cost of 1,000euro, then I later sell 1,000 shares of stock X @ 3euro each => 3,000euro. Then profit of 2,000 is liable to CGT, less 1,270 annual tax free allowance => 730 taxable for CGT.
Now, after paying CGT @ 20% of 730, I am left with approx 577euro + 1,270 => 1,847 profit.
- Will the tax advisor's fee for looking after this CGT calculation, payment and return be sufficiently less than my profit of 1,847, such that I still make a decent profit or would the tax advisor's fee eat up most of this figure or even exceed it, thus making the objective of gaining a profit pointless?
- Do tax advisors generally charge a % fee, a set one-off fee for each transaction or an annual fee?
- What information do tax advisors require, just purchase date and cost of shares, then sale date and proceeds? What about dividends/rights & bonus issues etc?
- In terms of FIFO(first-in/first-out) scheme, what info/documents are required from sharedealing broker/website in order to sort tax issues, where different amounts of shares are bought in the same company, but at different dates and prices? I understand that in these cases, the first shares bought are deemed the first shares sold.

Any advice much appreciated. Thank you.

 

[ClubMan]

- Will the tax advisor's fee for looking after this CGT calculation, payment and return be sufficiently less than my profit of 1,847, such that I still make a decent profit or would the tax advisor's fee eat up most of this figure or even exceed it, thus making the objective of gaining a profit pointless?

Really depends on the advisor, what you get them to do and what they charge. Difficult to be more specific - unless somebody wants to offer indicative rates for this sort of thing? For a straightforward CGT situation like the above you could do it yourself since you obviously know how to do it. You would need to check when you need to file a return and payment depending on when you sell shares but that's not hard to ascertain. However it can get more complicated (e.g. with different batches of the same share - FIFO rules - share splits/mergers/acquisitions, losses etc.) in which case professional advice can be worthwhile.

- Do tax advisors generally charge a % fee, a set one-off fee for each transaction or an annual fee?

No idea - sorry.

- What information do tax advisors require, just purchase date and cost of shares, then sale date and proceeds? What about dividends/rights & bonus issues etc?

As much info about your shareholdings as possible I'd say.

- In terms of FIFO(first-in/first-out) scheme, what info/documents are required from sharedealing broker/website in order to sort tax issues, where different amounts of shares are bought in the same company, but at different dates and prices? I understand that in these cases, the first shares bought are deemed the first shares sold.

For calculating your liabilities you'll need dealing receipts which should be issued as a matter of course. CGT is self assessed so you don't need to send this stuff in with your return/payment. However you might want to hold onto this documentation (for up to 7 years I think) in case Revenue ever conduct an audit.