Techzone

Making the most of annual tax allowances is a cornerstone of planning at this time of year. With regards to the capital gains tax allowance, it is a chance to take investment 'profits' tax free.

By not using them, a higher rate taxpayer could be out of pocket to the tune of £2,460 each year - it is very much a 'use it or lose it' allowance that cannot be carried forward.

Although capital gains tax as we know it was threatened by the recommendations of the Office for Tax Simplification in 2020, the Chancellor decided in the Autumn Budget 2021 that there were to be no changes. As far as tax year end planning is concerned, it's business as usual. So, what are the key things to remember when using the CGT allowance?

Scope for taking gains tax free

The annual capital gains tax free allowance remains at £12,300 for this year and for 2022/23.

How much of this is left to take portfolio gains at the year end will depend on net gains made during the year to date from all disposals.

Gains and losses made on disposals in the same tax year must be netted off against each other before the annual allowance is deducted. This can mean that some or all of the allowance can be wasted if there are large losses, as any unused allowance cannot be carried forward to future years.

Had she just sold enough of the OEIC shares to create a loss of £7,700 she would be able to fully use the allowance and still potentially be able to use the remaining losses to set against next year's gains.

Where losses made in a tax year are greater than the gains made, the unused losses can be carried forward to use in future years, but this time it is possible to choose how much of the carried forward loss they use so that none of the annual exemption is lost.

Doubling up with spouse/partner's allowance

The amount of gains that can be taken tax free can be doubled if a spouse's or civil partner's allowance can also be used, provided each partner has enough gains in their own name to fully use the allowance.

If one partner does not have any assets showing gains in their own name, then a transfer of assets (and the related gain) may be made between partners without incurring a charge so that both have enough gains in their own names to use up their allowance.

Rates

When gains are taken in excess of the annual allowance and any losses, they are added to a client's income to determine what rate is paid.

Gains falling in the basic rate band of £37,700 are taxed at 10% with gains in excess of this amount taxed at 20%. These rates are increased to 18% and 28% respectively if they relate to residential property.

Any unused part of the personal income tax allowance should be ignored when determining the rate paid on gains. So, a client with no income will still be taxed at the higher rate of 20% on any taxable gains made over £37,700 (after deducting the capital gains tax allowance and losses).

It should also be noted that for capital gains tax purposes, Scottish residents use the same basic rate band of £37,700 to set the rates, even though the income tax bands may be different.

Where gains are to be taken in excess of allowances, it therefore makes sense to ensure that they are only taxed at 10% where possible - another reason maybe for transferring assets between higher and lower rate tax paying spouses and civil partners.

Similarly, if a client makes gains on both their investment portfolio and on residential property in the same year, they can apply their allowance and any losses to their own advantage. For example, it may be beneficial to use the annual allowance against gains from residential property to save tax at 18%, leaving other gains to be taxed at 10%.

Where gains do arise, it may be possible to defer the tax due until a later year if the proceeds are used to subscribe for shares in an Enterprise Investment Scheme (EIS). But it is worth remembering that the deferred gains will be taxed at the prevailing CGT rate at the time of the disposal of the EIS shares.

Staying in the market

While there may be good tax reasons to take profits at the year end to use the allowance, there may be no desire to ditch those investments completely. Unfortunately, buying them back immediately is not an option due to the 'share matching' rules.

Broadly, where shares are sold and bought back within the next 30 days, the gain on the disposal is not the sale value less what was originally paid for them. Instead, it will be the sale value less the price they have been subsequently bought back for, which may mean there is no gain at all.

Being out of the market for 30 days or more may not be acceptable for some clients. But solutions can be found by re-purchasing shares immediately via an ISA or SIPP. If there is no scope for this, then a 'similar' share could be purchased, but note that for this purpose switching between income and accumulation shares in the same fund do not count as a disposal.

Summary

Using the annual CGT allowance to take profits tax free can be significant for a client's longer term savings. Failure to use the allowance on an annual basis could result in a much larger tax bill on accumulated gains in the future.

Further information on using the annual allowance at the tax year end and help on how gains are calculated can be found in our tax year end guide to utilising the CGT annual exemption.