Easing the pain
Using your Capital Gains Tax exemption every year can bring significant tax savings but needs careful management.
Capital Gains Tax (CGT) can creep up on you unawares, particularly when you want to sell an investment made many years ago. But by using your annual tax allowances, and using them each and every year, the damage can be greatly reduced.
It’s easy to believe CGT is a tax that only the wealthiest investors pay but, in fact, HM Revenue and Customs (HMRC) raises more money from it than from Inheritance Tax – over £5.5 billion in the last tax year¹. If you sell any investments that were not held in a pension fund or an ISA, you could be liable for CGT on the profits you earned. The same goes for sales of buy-to-let property or, indeed, any property which is not your main residence. If you sell valuable belongings such as artworks, jewellery or furniture for £6,000 or more, those gains too might be liable to CGT.
CGT is levied at the rate of 18% if you are a basic rate taxpayer, and 28% for higher rate taxpayers. However, not all gains are taxed. Every individual can take the first £11,100 of any gains in the current tax year tax-free. If your spouse is not using their allowance, you can transfer assets to him or her – a procedure that is not treated as a sale and so is not subject to CGT. If you both then sell assets before the end of the year, you can effectively double the allowance to £22,200. This is a case of ‘use it or lose it’ – if you don’t exploit the allowance this year, it doesn’t roll over and is lost forever.
You don’t necessarily have to part with the assets forever. In the past, you could use a technique called ‘bed and breakfasting’ to create a disposal of an asset for CGT purposes (and therefore a gain or a loss), followed by the prompt repurchase of the same asset. You would sell shares on one day and buy them back on the next, in order to realise a gain up to the allowance limit.
Today, however, HMRC carries out what it calls ‘share matching’. This means that if the same shares are bought back less than 30 days after they were sold, the sale does not give rise to a CGT profit or loss.
You can wait 30 days before repurchasing the stocks, though the market may have moved against you in the meantime, forcing you to pay a higher price. So before selling simply to realise a gain for tax purposes, you should consider whether running this so-called ‘market risk’ would be worth the tax savings.
A slightly different approach is possible in some circumstances. If you can substitute a second, very similar investment for the one you have just sold, then you can buy it immediately instead of waiting for 30 days, and still realise a CGT gain.
It’s also worth remembering that spouses or civil partners are permitted to buy back the shares sold by their spouse or civil partner immediately, so the gain is realised CGT-free while enabling the family to retain the assets.
Bed and ISA
The ban on bed and breakfasting doesn’t apply to investments that are repurchased inside an ISA or a self-invested pension plan (SIPP). So if you are selling specifically to realise tax gains, it might be worth buying them back inside one of these tax wrappers – in which case, you could do so immediately. This is known as ‘Bed and ISA’ or ‘Bed and SIPP’. There are costs involved, so you should take advice.
Of course, selling investments can lead you to realise losses as well as gains, and these losses can be offset against gains. So, if your gains are going to exceed your annual allowance, you could sell a losing investment. This would crystallise a loss that could bring the gains back down below the limit.
These are simple steps that can be taken to reduce the burden of CGT, but which also underline the value of wrappers such as ISAs, which offer a permanent shelter from the threat of tax.
¹ HMRC, January 2016
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.