Techzone

The annual CGT exemption

The CGT annual exempt amount from 6 April 2024 has been cut to £3,000 (£6,000 2023/24). Crystallising gains up to the 'allowance' has been an effective part of tax year end planning for many advisers who actively manage their client portfolios, allowing an opportunity to take a slice of investment profits tax free.

With a greatly reduced annual exemption common tasks such as rebalancing of portfolios or extracting capital to fund ISA subscriptions will more frequently result in CGT becoming payable.

Managing gains within the annual exemption each year can be both time consuming and costly. It provides a maximum tax saving of £600 from April 2024. But it can still be a valuable exercise especially if the process can be automated to eliminate a significant slice of the time and costs involved.

Where shares are sold to create gains with the intention of utilising the allowance it is important to consider the share matching rules especially if the plan is to reinvest back into the same shares.

Share matching rules

The share matching rules mean that when a disposal is made, the shares sold are matched with shares aquired in the following order:

1. shares acquired on the same day as disposal (the 'same day rule')
2. shares acquired in the 30 days following the day of disposal
3. all other shares on an average cost basis (these are sometimes referred to as the 'Section 104 holding')

This means that where the same shares are sold and repurchased either on the same day or within 30 days, the full gain built up over the total time that the shares were owned is not crystallised. Instead, the repurchase cost becomes the acquisition cost for the shares disposed of and the gain/loss is calculated using this figure.

When these same shares are disposed of in future, the original acquisition cost will be used to calculate the gain, rather than the repurchase cost.

Avoiding the 'share matching' rules

There are several options which allow investors to crystallise gains and use their annual exemption and still remain invested in a particular fund without being out of the market for 30 days.

Bed and SIPP

Shares can be sold and the same shares immediately bought back in a pension, such as SIPP, which allows self-investment. This won't trigger share matching rules for rules for capital gains tax as the shares are being purchased by the SIPP trustees/administrator and not personally by the investor. Doing this avoids being out of the market for 30 days.

But the advantages don't stop there. Where the sale proceeds are used to make a pension contribution, this could attract 20% tax relief which is added by the pension provider. Further tax relief for higher and additional rate tax payers may be claimed via self-assessment.

In addition, holding the investments within a pension means that there will be no CGT on future gains and the value of the investment is generally outside the estate for IHT. Of course, using the pension wrapper may not be suitable if the money is needed before age 55.

Bed and ISA

Another way to avoid being out of the market for 30 days is to sell funds and buy them back in an ISA.

Shares held within an ISA are generally free of both income tax and CGT.

Bed and Spouse

This is where the shares are sold by an individual and bought back in the name of their spouse or partner. The disposal of shares crystallises the gain and allows the individual to make use of the CGT allowance. Of course, to buy back the shares, this requires a gift of the disposal proceeds to the spouse/partner. There's no need to wait 30 days to avoid share matching rules.

Taking it a step further, if the spouse or partner has not maximised their pension funding or ISA allowances, they could use the proceeds to make a contribution to a SIPP or ISA and repurchase the shares within the tax wrapper to gain additional tax benefits.

Alternatively, if there are gains in excess of the CGT allowance, some of the shares can be gifted to a spouse or civil partner to benefit from their CGT allowance. There's no gain when the shares are gifted and the spouse acquires the asset at the original base cost.

The spouse can then sell the assets and use their CGT allowance. Again, the proceeds from sale can be used to fund their own ISA or pension if they haven't already fully funded these in the current tax year.

Buy similar asset

Share matching rules mean that the gain won't be crystallised in the normal way if the investor buys back into the same fund within 30 days. However, this can be overcome by buying assets in a similar fund. This is because the rules only apply where shares in the same fund and share class are repurchased.

This gives the investor the opportunity to sell a fund, crystallise a gain to use the annual CGT allowance, and buy back a similar fund without having to wait 30 days.

Inadvertent disposals

Occasionally an inadvertent disposal can result in gain which was unexpected. The share matching rules can come to the rescue if action is taken quickly and the same shares are repurchased within 30 days.

Share matching rules are designed to prevent investors from selling a fund, using their CGT allowance, and then buying back into the same fund ashort time later. This activity used to be very common towards the end of a tax year.

However, the rules can offer an invaluable way of amending the capital gain or loss position on a sale that may have been placed in error.

Where an investor has sold an asset and created a large gain, it's possible to buy back into the fund within 30 days and the share martching rules may mean the large gain is largely replaced by a much smaller one or possibly even a loss.