When you see the stock market in movies, it looks easy. It looks like nothing but fun and quick cash (and sometimes illegal substances). And, for sure, the real stock market can offer those things. But the films you’ve been watching often leave out the unsexy details. One of those unsexy details is capital gains tax.

Many people have heard the term capital gains tax. Many know what it is but don’t think it applies to stocks. Well, they do! Here’s a quick rundown of what you need to know about these taxes on your stock sales.

Capital gains tax: a quick explanation

A capital asset is something you own that you use outside of business. The money you’ve sunk into the initial price and subsequent costs are combined and called the basis. When you sell a capital asset, you either make a gain or a loss. If the price at which you sell the capital asset is more than the basis, then you’ve made a profit. And in the government’s book, that means you’ve made a taxable capital gain. The capital gain minus the basis is the total profit. That value is what is going to be taxed via a capital gains tax. When filing your taxes, you need to get yourself a Schedule D (form 1040).

So this applies to stocks?

Yes. Capital assets include land, vehicles, real estate and securities, among other things. Securities include bonds and stocks. If you own stock for personal investment purposes, then it’s a capital asset. The profit you make from the sale of a stock can be taxed by your national revenue agency. So if you want to work out the total money you’re going to pocket after an exchange, you need to calculate capital gains tax.

Are there different types of gains?

There are indeed. There are what we call long-term gains and short-term gains. Short-term gains are the taxable profits you made from the sale of stock you held for less than a year. They don’t benefit from any special tax rate. The value, minus the basis, is usually taxed depending on your income. Long-term gains are the taxable profits you made from the sale of a stock that you held for over a year. The tax rates on these are much cheaper. In fact, if your ordinary income tax is less than 15%, there’s a chance you’ll pay no capital gains tax at all.

Keeping a record

When it comes time to file your taxes, you need to have everything in order. You’re not going to be taxed for every single stock; that’s unreasonable and will hurt the IRS’s calculator fingers. What you need to do throughout the year is work with your stock broker to record all of your gains and losses. These should be arranged into short-term and long-term. Oddly enough, this is when you find out whether or not you actually made a short-term gain or loss in the long run. If all your short-term losses outweigh all your short-term gains, then you’ve made a short-term loss. Whatever the result, put the calculation on Schedule D when you’re filing your taxes.

A loss isn’t a total loss

Revenue agencies aren’t completely heartless. Keep a record of your losses. You can use these losses to offset any future capital gains tax you incur!

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A study by the FSB has reported that many UK small business owners are struggling to manage their accounts properly. On average, 12 working days are lost each year to the accounting process and the total cost to small businesses for tax administration is around £500 million a year.

Around 50 per cent of all small businesses spend around two to eight hours each month understanding, calculating and completing tax forms. On top of this, 11 per cent of businesses spend between two and six days every month on financial administration.

For small businesses, good tax management can make or break the company. Having a thorough understanding of the savings that can be made on income tax is vital for businesses, but this can be very time consuming. In addition to a personal allowance, which should be fully utilised to reduce a tax bill, companies can also make further tax reductions through various tax allowable expenses.

Tax allowable expenses

Capital allowances refer to the tax relief on certain items that are vital for business. Such items include cars, computers and machinery. There is a limit to how much each person can claim in a year, which is called the capital allowance or annual investment allowance. The current annual investment allowance is £250,000. Businesses cannot claim tax relief on the whole cost, but instead annual allowances are written down by claiming a percentage of the total cost each year following the initial purchase.

Tax deductions can be made against the cost of running a car for business. It is important to keep an accurate record of business car use, as private car use is not tax deductible. The easiest way to manage this is to just claim on the fuel used in travelling on business and use a business card to purchase the fuel. Total mileage is used to calculate the allowance, so also keep a record of how many miles are travelled on business, and how many for private use.

Record keeping

Good record keeping is vital for all businesses. Without proof of every purchase and sale a company cannot provide proof of their tax liability. Although self-assessment means that most of the time a small home based business will not need to provide documentary evidence, sometimes HMRC do carry out inspections on small businesses.

Companies should keep expenditure receipts, at least all that are included in the tax calculation. If driving allowance is being claimed fuel receipts are the best evidence that the car is being used for business.

Where to get information

The best source of advice is the HMRC website. Tax rules and allowances change often and privately run websites sometimes display out-of-date information. If you prefer to have printed information, leaflets and advice can be found at your local Citizens Advice Bureau. Many larger libraries also have a business section and stock leaflets and other information to assist small business owners.

Employing a qualified accountant or a tax specialist

Hiring a tax specialist can have many benefits although the main objective is to reduce the size of the tax liability. HMRC adjust the tax rules every year and it is very difficult for entrepreneurs to keep up to date with these changes while also devoting sufficient time to running the business. A good accountant is a wise investment and the savings made in taxation and other financial dealings might well recoup the professional fees payable.

Self-assessment tax returns

Sole traders who are trading under their own name can submit an annual self-assessment. This can be submitted online or in paper form. Online is easier and has a later deadline, so is the preferred option. For those with a simple business structure this is a quick and easy process. However, for more complex businesses professional assistance may still be required.

Umbrella companies

Due to the growing complexity of financial administration and taxation many small businesses and sole traders are using the services of umbrella companies to manage their finances. An umbrella company acts as a parent company for a sole trader or small business. This means that the umbrella company manages all the paperwork and files tax returns for their client. The client is paid a monthly salary via a PAYE system.

The biggest advantage for sole traders is that they can focus on their core business rather than wasting hours every week with administration. Savings are also made through improved tax avoidance. Umbrella companies are managed by skilled accountants and tax specialists who make every tax deduction that is possible for their clients.

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“Nothing is certain but death and taxes” – a quote, from Benjamin Franklin, that we will all have heard at one time. Neither is something we look forward to, but while we can’t do anything much about the former, there is plenty we can do about the latter.

Tax planning can be broadly defined as minimising one’s exposure to tax through ordering one’s financial affairs in such a way that only the right amount of tax due under the law, and no more than that, is paid. Tax planning is completely legal and is actually welcomed by the UK tax authority, HM Revenue & Customs (HMRC)

However, while HMRC wants everyone to pay the right amount of tax it hasn’t got the time or the resources to be able to provide all taxpayers with a comprehensive service to explore each individual’s financial / personal and business circumstances. So, unless your tax affairs are very simple – eg, an employee coming under the PAYE system – there is a very strong chance that you may not be paying exactly the right amount of tax to HMRC. That is not the fault of HMRC or indeed the result of anything you might have done, or not done. There are an awful lot of tax rules out there and the knowledge of what you are entitled to claim in the way of expenses, or what you can legally do to minimise tax, is not common knowledge amongst small business owners.

A quick look around the Internet can thoroughly confuse you about tax as this term is used to cover all sorts of charges and levies that are imposed by local councils as well as HMRC – eg, council tax and business rates.

The main areas of taxation that anyone studying tax planning needs to think about are those run by HMRC – income tax, capital gains tax, National Insurance contributions, VAT and corporation tax, and finally, when we get back to the subject of death, inheritance tax. That seems a reasonably small number to deal with, right? But beware, as within each one of these taxes there are vast numbers of complications, allowances, exemptions, concessions, thresholds, practices, etc. that you probably don’t know about. Do you know for example, if you are running a small business, whether you would be better off forming a company than working as a sole trader or partner?

If HMRC doesn’t have the resources, and the Internet information baffles you, where can you go in order to get good quality tax planning advice? The two areas of expertise to help you are accountants (indeed you may already have one) or if you want a more comprehensive review of all of your financial / taxation circumstances an Independent Financial Advisor, who is likely to be better informed about a whole range of taxation issues. Such a company will probably offer you a free consultation to assess your needs, and will provide a tailor-made service if required.

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One thing that always seems to be on everyone’s mind is taxes. Whether you are filing your tax return or are curious about a tax-related matter that applies to you and your business, you should consider talking to a tax consultant who is highly experienced in a wide variety of tax-related issues.

Prepare and File Tax Returns
Many people have a difficult time filing their tax returns on their own, and some count on software programs or large tax preparation chains for assistance with their taxes. If you are looking for someone who can help you with your tax return, you should consider contacting a tax consultant; he or she can make sure that you file for any refunds or credits that you qualify for, and a tax consultant can also help ensure that your tax return is filled out accurately, which can help prevent you from getting audited or getting in trouble with the IRS.

Give Help or Advice
There are times when taxes can be complicated and confusing, regardless of your tax situation. Fortunately, you can go to a tax consultant for advice about taxes; in many cases, their expertise can help you out greatly.

– If you are filing your personal taxes and are unsure of what type of deductions you should file for, whether you should file your taxes with your spouse or what forms you will need to fill out, a tax consultant can help.

– Filing taxes if you are self-employed can be challenging, and it can be easy to miss out on deductions and credits that you qualify for. A tax consultant can assist you and answer any questions that you might have.

– If you have trouble with nearly any part of filing your taxes, such as how to file taxes for your business or whether or not you qualify for a certain type of deduction, a tax consultant can give you the advice that you need.

– Business owners often wonder about various tax-related matters, but having a tax consultant on speed dial can help.

Assist with Audits
Going through the process of being audited can be stressful and frightening, regardless of if you are a business owner or an individual. You might not know how to handle the situation, but a tax consultant can help steer you in the right direction. Having a tax consultant by your side can not only help prevent you from making mistakes or getting in trouble with the IRS, but it can also give you peace of mind during a scary and unsettling time.

The truth is, tax consultants do practically anything when it comes to helping their clients with tax-related matters. Some work specifically for certain firms and companies, and others do work for both individuals and businesses alike. If you think you need help with tax matters, don’t be afraid to contact a tax consultant for assistance; in the long run, you are sure to be glad that you did.

Sally is a content specialist for FCTC, FCTC can provide tax investigation insurance to help your business and clients through any HMRC tax enquiry, visit FCTC.co.uk to find out more about tax insurance.

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