Understanding Capital Gains Tax on Shares: Cash ISA vs. Stocks & Shares ISA

I will be selling some shares. It will take me over my capital gains limit by a £1000 roughly. If I get this paid directly into Cash ISA will I avoid paying Capital Gains Tax or does it have to be invested into a Stocks & Shares ISA to avoid paying CGT?

I assume your shares are held outside an ISA. And you will go over your tax-free allowance of £3,000 by £1,000. There is not a lot you can do because the tax becomes due when the shares are sold, regardless of where you then transfer the money. If you pay the money into a cash ISA you will still need to pay the CGT because this gain has been ‘realised’ when you sell the shares. CGT is rear-view mirror stuff so it doesn’t matter where you send the proceeds of the sale in the future – it’s about where the money has been in the past and when the gains are realised.

You can do something called ‘Bed and ISA’ and move the shares over into a Stocks and Shares ISA as part of your maximum contribution of £20,000 in any one tax year. But again the investment platform would sell the shares down, which triggers CGT, and then buy them back in the ISA. So this Bed and ISA process is a smooth and relatively admin light way to shove shares over into a tax-proof account for FUTURE gains protection BUT it doesn’t get around the fact that you will become eligible for CGT the second you sell them or Bed and ISA them. One option is to sell enough shares this year to only release £3,000 gains. And then sell some more after 6 April next year, taking advantage of your allowance next tax year. The problem here is it can be the tail wagging the dog – if you make your investment decisions all about tax, then sometimes people end up making poor decisions which can cost them a lot more than a bit of CGT. You’ll also pay two lots of share dealing charges which is worth adding to the considerations.