Capital Gains Tax planning

You should keep accurate records of every purchase and sale of assets that are likely to involve you in making capital gains over time. 

If you sell a portfolio of shares and do not have proper records to hand, you are likely to find that the professional fees for calculating your liability to Capital Gains Tax make an unwelcome dent in the gain that you have made. 

If you inherit assets you should keep a record of their valuation at the date of the donor’s death, which you should obtain from the solicitor or executor handling the deceased person’s estate.

If you have gains from both residential property and other assets you can set the annual exempt amount against the gains that would be charged at the highest rates

If you decide to dispose of an asset you should be aware of the annual exempt amount and whether you have already used up some or all of this in the current financial year. 

So, for example, if you wish to sell a second property that you own, you might wish to delay the sale until the next tax year if you have already used up your Capital Gains Tax exemption elsewhere in the current tax year. The same might apply if you wish to dispose of a large shareholding.   It might make sense to sell half of the shares now and the other half at the beginning of the next tax year so that you use the annual exemption twice.

Of course, tax is only one consideration and you will have to take account of the fact that the price of your property or shares might fall while you delay, or indeed, you might be in a hurry to realise the capital.

As the Capital Gains Tax annual exemption is not cumulative and is lost if not used, you should be aware of the usefulness of ‘crystallising gains or losses’ in a tax year. 

Such gains or losses can also be transferred to your spouse (i.e. by transferring the asset to them) to be used by them.

By taking positive action before the tax year end you may be able to save 20% on your Capital Gains Tax bill and recoup part of the loss you have suffered on a disappointing investment.

A benefit of using investment portfolios held on an online investment platform is that it is very much easier to monitor capital gains rather than having individual investments with a selection of investment houses. It is also easier to ‘wash out’ gains each year by selling units which have made gains and repurchasing units in other funds (or in cash for 30 days). 

Whenever portfolios are ‘rebalanced’ the effect is to wash out gains well within the annual exempt amount.

Moving money from a General Investment Account into a Stocks and Shares ISA Account each year also allows gains to be dealt with annually.

Spouse transactions

In these notes ‘spouse’ includes civil partner. As each spouse has their own annual exempt amount and the rate of Capital Gains Tax is determined by adding the gain to your income it makes sense to:

• hold assets in joint names, where possible, so that any gain can be reduced by two annual exempt amounts and any gain can use up any excess of basic rate tax allowance for both of you, and

• transfer assets from you to your spouse if you have already used up your Capital Gains Tax exempt amount for the year. It is particularly important for higher-rate taxpayers to pass assets to a basic rate or non tax paying spouse.

If you have already made capital gains within the current year which would otherwise be covered by the annual exemption, you might want to consider deferring the sale of the asset which will produce a loss until the next tax year.  Otherwise you could be effectively wasting the losses.

If you are carrying forward a loss from a previous tax year or years you have to offset it against any gains in the current tax year that are in excess of the annual exempt amount.  However, once you have done that you can continue to carry forward to future years any excess loss which is not required to reduce your current gain to the level of the annual exempt amount.

There is no Capital Gains Tax to pay on ISAs, National Savings Certificates, Gilt-edged securities, qualifying corporate bonds or VCTs (venture capital trusts).

The gains made on Life Assurance Bonds will not involve you in Capital Gains Tax.  In this case, however, you are not escaping the payment of tax, it is just that the life assurance company has already paid corporation tax on the profits made by the underlying funds so you do not have to pay it again. 

Enterprise investment schemes are very high risk investments and not suitable for most investors but they are useful in the right circumstances.

Where you have become liable for a taxable capital gain you could use an Enterprise Investment Scheme to delay paying the tax and possibly to remove it altogether. You would do this by reinvesting the taxable capital gain in an Enterprise Investment Scheme.

Deferring the chargeable gain in this way means that it is reduced by the effects of inflation and by a further annual exemption in the year that the Enterprise Investment Scheme is encashed. 

If you were to die with the chargeable gain outstanding it is not payable by your estate. 

The rate of Capital Gains Tax is determined by adding the gain to your other taxable income as a ‘top slice’.  Therefore, if you can reduce your other taxable income you may be able to reduce the rate of tax on a capital gain. 

Making an additional pension contribution in the same tax year as the gain is created could therefore reduce the resultant Capital Gains Tax charge.