What tax do shareholders pay?
The following is a very basic guide to the tax which may be payable by UK shareholders
in UK companies. Detailed consideration of taxation matters are beyond the scope
of this database. For more information, go to the Inland
Revenue website
Quite apart from the tax paid by the company itself (see related topic: What
tax does a company pay?) the company's shareholders may be liable to income
tax on the dividends they receive from the company, and to capital gains tax
if they sell their shares at a profit.
Income tax on dividends
When the company has made profits (after meeting all its expenses, including employees' and directors' remuneration) it may decide to retain all or part of these in the business or to distribute them to the shareholders as a dividend. This dividend is not an expense of the company and cannot be set off against its profits.
Any dividends (or other distributions) received by shareholders are liable
to income tax assessed AS investment income. In 2006 - 2007 investment income
is subject to tax rates which are lower than those applicable to most other
types of income. The lower and basic rates are both 10% and the higher rate
is 32.5%.
The income is the dividend plus a tax credit (supplied by the company) of 10%
of the gross amount. Any lower or basic rate tax is then paid. If the shareholder
is a higher rate taxpayer, the dividend income is treated as the top slice of
the taxpayer's income and the additional tax will be assessed and collected
on submission of the self assessment tax return.
Capital gains tax on sale of the shares
If the shareholder sells the shares at a profit, capital gains tax may be payable
on the profit made. The tax is assessed on the increase in value, that is the
price received on sale less the original cost. Incidental expenses of purchase
and sale, indexation and tapering relief can be taken into account, and there
are various reliefs for particular circumstances, such as retirement relief,
re-investment, etc., which are presently beyond the scope of this database.
An individual has a personal allowance for capital gains which in 2006 2007is
£XXX (i.e. gains up to that amount are tax free). To make
full use of this allowance, shares are often sold and then re-purchased (or
other investments bought).
Inheritance tax
If a shareholder dies, the shares will be part of his or her total estate on which inheritance tax may be payable. In some cases, shares will qualify for business property relief.
If shares are given away, but the donor dies within seven years, there may also be inheritance tax implications. Such a lifetime gift will be a 'potentially exempt transfer', which becomes a chargeable transfer on the donor's death within that period. There are tapering provisions according to the length of time before the donor dies, and business property relief may also apply.
Related topics
The Inland
Revenue website gives fuller details.
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