Techzone

In April the CGT annual exemption will be halved for the second successive year from £6,000 down to £3,000. This leaves one last opportunity to make use of the higher CGT exemption before it is cut again. This time of year, we often see savers extracting profits from their investment portfolio within their unused annual capital gains tax allowance to limit how much CGT they may face in the future.

It is therefore important to avoid the potential traps when calculating how much of a portfolio needs to be sold to keep gains below £6,000. To help we have compiled ten points advisers may need to consider this tax year end.

1. Creating the gain and share matching rules
   When disposing of shares or units, the intended gain will not materialise if the same shares are repurchased on the same day or in the next 30 days. Repurchases within this timeframe mean that the gain must be recalculated using the repurchase price as the ‘cost’ instead of the original cost (tax pool cost). Where there has been little movement in price between date of sale and date of repurchase, the result may be that the gain is negligible, and so the allowance wasted.
2. Remaining in the market
   The share matching rules can mean being out of the market for a particular share for 30 days. To avoid this, clients may consider repurchasing the shares through their ISA or SIPP. In this way, shares can be sold and repurchased on the same day and the gain would stand i.e. the matching rules would not apply. Alternatively, the shares could be repurchased by the client’s spouse or civil partner, or even through a junior ISA for children or grandchildren to keep shares in the family.
3. How much allowance is available
   Some or all of the annual CGT allowance may already have been used on disposals earlier in the year. These could include the sale or gift of any asset owned by the client. The rebalancing of portfolios may also have generated gains.
4. Transferring assets to spouse/civil partner
   Clients may be able to double their CGT exemption to £12,000 this year if they are able to transfer assets to their spouse or civil partner. If a client’s spouse has not used their allowance, then investments with a gain can be transferred to them and then disposed of before 5 April. While the transfer between partners is technically a disposal, there is no gain on this transaction (commonly referred to as a no gain/no loss basis). This effectively means that the receiving partner receives the investments at the original cost.
5. The ‘pooled’ cost
   When making a disposal, the cost of the investments disposed of must be identified. Where there have been multiple purchases on separate dates, it's the average or ‘pooled cost’ of all the acquisitions which is used to determine the gain. If only disposing of part of a holding, then the same proportion of the pooled cost must be calculated to work out the gain - i.e. if the disposal amounts to 25% of the total value of the holding, then 25% of the cost pool must also be identified in order to work out the gain.
6. Additions to the cost pool
   The pooled cost is normally the sum of all amounts invested in a particular share or unit. This will include ad-hoc additions to purchase more shares as well as income distributions reinvested which will also purchase more shares. However, if accumulation shares are held, income is automatically reinvested and increases the value of each share – it's not used to purchase new shares or units. The amounts reinvested must therefore be identified and included in the cost pool which, ultimately, will reduce the gain made on their disposal.
7. Inherited shares
   Where a client inherits shares on the death of another individual, it's normally the value of those shares at the date of death that are included in the cost pool. If shares were jointly owned, then after one owner dies the cost pool will reflect the fact there has been a CGT free ‘uplift’ on the first death. The acquisition cost will be 50% of the value at the date of death and 50% of the original cost. Again, this will reduce the gain where the market price has risen since the death, or if the price has gone the other way, potentially increase the loss available to offset other gains.
8. Equalisation payments
   New investments in shares or units made between distribution dates (but before the ‘ex-dividend’ date) entitles the investor to the full distribution at the next distribution date. However, because they have not been invested for the whole period over which the distribution has been earned, the cost of the purchase is reduced by an ‘equalisation payment’. This will be shown on the distribution certificate and is essentially a return of capital. To reflect this, the amount included in the tax pool is the amount invested less the equalisation payment. The resulting gain may therefore be slightly more than expected.
9. Losses
   Capital gains and losses arising in the same tax year must be set-off against each other before the CGT allowance can be used. If losses wipe out gains, this means the allowance will be wasted. Therefore, to maximise the use of the allowance, gains must exceed losses by £6,000.
   
   Losses made in earlier tax years don't have to be used in the current tax year. Clients may elect to use some or all of these losses in the current tax year or continue to carry the loss forward to future years. For example, if a client has losses of £20,000 carried forward from earlier years and have net gains of £11,000 in this tax year, they could elect to use £5,000 of their losses, which together with their annual exemption of £6,000 would wipe out the gain. This may be useful bearing in mind the cut to the CGT allowance for 2024/25.
10. Reporting gains
    With the cut to the annual exemption also came new reporting limits. Self-assessment will always be needed if gains exceed the exempt amount meaning there is tax to pay. But even if the gain is below the £6,000 exemption a tax return will still be required if the total proceeds of sale exceed £50,000.

The position after April

A greatly reduced allowance will have a much bigger impact on those who used it to take profits year on year than someone with a large one-off capital gain. With only £3,000 of tax-free gains available from April, common tasks such as rebalancing of portfolios or extracting capital to fund ISA subscriptions will more frequently result in CGT becoming payable.