Many people now own shares in publicly listed companies such as Glanbia, Ryanair, Kerry, Vodafone etc, but some are unaware that a little care and attention in managing your stocks and shares can save you a considerable amount of money in tax.

Tax

Shares sold at a profit or Gain incur a Capital Gains Tax liability. The current rate is 33% of the Gain.

The Gain is the difference between the sale price and the original cost price of the shares. So it is important to have a record of the original cost of the shares. This is known as the Base Cost.

Tax saving – Previous Losses

Previous losses on assets such as Property, Bank shares, (Anglo), etc are available for set-off against future gains. So any Gains will be tax-free until the previous losses are completely used up.

Tax saving – Annual Tax Exemption

Individuals can make a Gain of €1,270 free of Capital Gains Tax in each tax year. By holding the shares in joint names, spouses can generate Gains of €2,540 tax free each year.

It is important to utilise the annual €2,540 Exemption from Capital Gains Tax. This is done by “bed and breakfasting” the shares.

Bed & Breakfasting

“Bed & breakfasting” means selling a sufficient number of shares each year to generate a Gain of €2,540 (€1,270 for an individual), and buying them back again after a minimum of 30 days. The effect is to increase the Base Cost of the shares, and thereby lessen the Capital Gains Tax liability.

There is a risk that during the 30 days, the shares might jump in price. Of course if you sell, and buy back at a higher price, you lose some of the benefit of “bed & breakfasting”.

Dividends and Scrip Dividends

Dividends are a significant element of value in ownership of shares. By ensuring that you own the shares at the “ex-dividend date” you maintain your entitlement to the dividend.

Some companies offer the option of “Scrip Dividends”. This means the company issues new shares instead of paying cash dividends. There is no tax advantage for the owner, and scrip share certificates are liable to be lost. Replacing a lost certificate is expensive, and may cost more than the shares themselves are worth, making it uneconomic to replace a certificate for a small number of shares.

Our Recommendation

The paperwork generated by even a small amount of shares held in paper certificates can be daunting and confusing. We recommend holding shares in a Stockbroker account.

This ensures that

• no loss of share certificates occurs,
• accurate records of Base Cost are maintained,
• Bed & Breakfasting is made easy,
• Scrip Dividends happen automatically,
• no more lodging (or losing) small dividend cheques,
• paperwork is minimised,
• a statement is issued every year setting out the Capital Gains Tax and Dividend Withholding Tax calculations for your Accountant/Tax Advisor.

To discuss this further, give Aidan a call at 087 2621006.

Aidan Wall Financial Services Ltd Trading as Lifetime Financial Planning is regulated by the Central Bank of Ireland.  Investments can fall as well as rise. Past performance is not a reliable guide to future performance.