I’m trying to oversee my mum’s finances. Over the last 25 years she has inherited a range of investments from two sources. She has never sold any, and with some investments she also chose to do dividend reinvestment so the number of shares she owns now is not what she inherited. None of the investments are in a tax wrapper, so if she needed to sell any, they would all be liable for capital gains tax – but how do I calculate the profit on the sale?

Nick, via email

The old adage that ‘tax doesn’t have to be taxing’ really gets challenged with queries like these. There isn’t a simple answer to this question, but it’s perfectly possible to work out the gains and report them to HMRC.

Let’s start with the inherited assets. When someone dies their capital gains die with them, meaning that effectively the clock is reset on any gains at the point that they die. In this case the investments were then transferred to a beneficiary, who kept them outside an ISA or pension wrapper, meaning they would have started to accumulate taxable gains if they rose in value.

So, if someone wanted to sell some, or all, of the investments now, they’d need to calculate the capital gain on the assets in order to work out how much tax they owed.

To do this you usually deduct the purchase price from the sale price, to give you any gain (or loss, if the investments have fallen). The rules recently changed on capital gains tax (also known as CGT), meaning you can only make £6,000 of gains in the 2023/24 tax year before you have to pay the tax (from 2024/25 this will drop again to just £3,000). If you’re a basic-rate taxpayer you’ll pay 10% tax on any investment gains, while higher and additional-rate payers will pay 20%.

That means to work out the gain you need the purchase price. But for inherited assets this will be the price on the date the person died, rather than the original price they bought them for.

WHERE TO FIND THE RIGHT INFORMATION

If you’re still in touch with the representatives for the estate from you inherited the investments then you can contact them and they should have this information. If the estate was liable for inheritance tax, they will have calculated this valuation when filing with HMRC for inheritance tax purposes, meaning they will have the value on the date of death.

If a long time has passed you may no longer have the representatives’ contact details to hand. If that’s the case you can search online for the value of the shares on the date of the individual’s death, and then multiply it by the number of shares you inherited. Many investment platform websites will have this information, as well as websites including Shares.

But clearly share prices fluctuate every day, so on that date of death the share price could have moved a lot. You’ll need to find the high price and the low price that day and take an average of the two to get your final value. For example, if you inherited 2,000 shares in Lloyds (LLOY) and the individual died on 3 May 2022, the high price was 46.61p that day and the low price was 45.45p, giving an average of 46.03p. If you multiply that by the 2,000 shares you inherited that gives a value of £920.60. That would be your basis for calculating any gains.

All of this assumes we’re dealing with shares listed on an exchange. If you inherited unlisted shares the process is trickier, as there may not be a publicly available valuation. If you cannot find the information online you can submit an estimated valuation to HMRC on your tax return and flag that it is an estimate.

Kate Aitchison, tax director at RSM, suggests you provide an explanation to HMRC on how you achieved that valuation. She says: ‘You’ll need to flag to HMRC that it’s an estimated value and put a narrative to HMRC on how you’ve got to that valuation. They have got 12 months to enquire into that return, but after then you can assume it’s ok. Equally if you find a more accurate data after you’ve filed, you’ve got 12 months to adjust that return.’

HOW DO YOU ACCOUNT FOR REINVESTED DIVIDENDS?

When companies pay out dividends you can choose to receive them as cash or you can choose automatic reinvestment, which means the dividend money is used to buy more shares. This is a great way of boosting your returns, as you’ll then own more shares, which means a higher dividend next time (assuming dividends aren’t cut) and then even more shares purchased with dividend money next time, and on and on.

However, it can be tricky for capital gains tax purposes as each reinvestment is a fresh acquisition of shares – and often it’s a small number of shares each time. Which gives you a new valuation for CGT purposes.

The good news is that if you own the shares via an investment platform, they will provide you with this information for each tax year, with the number of shares bought and their value.

If you own them directly then it’s a good idea to make a note in a spreadsheet of the number of shares, price of them and total value each time you reinvest your dividends. This means you’ll have a record to be able to refer back to when you come to sell the shares and calculate your CGT.

If you have multiple purchases of the same share, at different prices, you can use a rule called the ‘share pooling rule’. This means that you take an average price per share for the base cost, and this ‘pool’ can run for years, meaning that each time you buy some more shares, you just adjust your average share price across all your purchases. This average price is then used as the basis for calculating capital gains.

So, if your pooled average share price is 50p per share, and you have 100 shares, your starting valuation will be £50. Assuming you then sell those shares for 75p a share, your sale price will be £75, giving you a gain of £25.

WHAT HAPPENS IF I SELL SHARES AND BUY THEM STRAIGHT BACK?

Just to make it a bit more complicated, there are different rules if you sell shares and then buy them back within 30 days. It’s to stop people selling shares to realise a gain (usually up to their CGT allowance) and then buying them back again immediately.

Put simply, if you sell shares and then buy them back straight away, the original purchase price will be used for calculating any gains, rather than your new purchase price. If you’re in this situation it may be better to seek professional help as it gets pretty technical.

WHAT IF I DON’T HAVE THE CORRECT SHARE DEALING RECORDS?

Aitchison said that if you don’t have these records then firstly you should bear in mind that if the gain is under the annual CGT limit you won’t need to file any paperwork for them anyway.

So, in the current tax year if you are confident your gains are less than the £6,000 tax-free allowance you won’t need to report them, meaning you don’t need to do these calculations.

If you think it will be over this limit but you don’t have records, she recommends completing the information to the best of your knowledge. You could estimate the figures and include a narrative to HMRC on your self-assessment to see if they agree.

COULD I SHIFT THE INVESTMENTS INTO A TAX WRAPPER?

One thing to note if you have investments sitting outside an ISA, is that you could benefit from moving them into an ISA.

This is called ‘Bed and ISA’ and means you sell the investments and buy them back within an ISA, which means any future gains and dividends will be protected from tax.

You’ll need to ensure you have some of your £20,000 annual ISA subscription left. If you do, you can sell investments up to your current capital gains allowance (£6,000 in the current tax year) and then buy them back in your ISA. You can do the same next April to lock in more gains, tax free, albeit remembering that the capital gains allowance falls to £3,000 in that tax year.

Please note, we only provide information and we do not provide financial advice. If you're unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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