Equity, in its crudest term, is the full value of something when broken down into assets. An asset, while we’re here, is an item of value. An example of a few common assets that you might have are your house, your car, your jewellery etc.
In the context of finance, equity can refer to either the value of all the shares in a limited company, or the value tied up in a property after the mortgage.
How does it work?
If the company’s assets are liquidated, the equity would be what the shareholders are returned. In simpler terms, when you buy shares in a limited company, you are buying equity in that company.
How does equity work with tax?
If you make income through equity, you might be liable to pay tax on your earnings. Take a look at the following scenarios where you might owe tax:
- If the companies you own shares in pay you dividends over £2,000, you might need to pay dividend tax
- If you make profits from selling shares, and those profits are over the Capital Gains allowance (£12,000 in 2019/2020), you will need to pay Capital Gains Tax (CGT) on them
- You need to pay CGT when you sell shares that you received as part of an employee incentive scheme (for example, EMI)
- Be aware that any profits from selling shares of EIS/SEIS startups are tax-free
- You can claim Income Tax relief when you invest in EIS/SEIS startups
- You don’t need to declare or pay tax on any profits or dividends from shares held in a Stocks & Shares ISA
- When it comes to equity release, you won’t owe tax on money made through these products
To read more about tax owed on equity, head over to HMRC for more detail.
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