Techzone

The race is on to get one last shot at the £12,300 Capital Gains Tax ‘allowance’ for clients with gains in their investment portfolios. The CGT annual exempt amount is to be cut to £6,000 from April 2023, and then cut again the following year to just £3,000.

HMRC estimate* that halving the exemption will result in additional 235,000 more people needing to report their capital gains, with less than 100,000 of those affected routinely filing self-assessment returns.

This figure assumes that existing behaviours continue. In reality, many will simply reduce the amount of gains they crystallise to just below the new CGT exempt amount each year. But when the allowance is cut to £3,000, advisers will need to ensure the time and associated costs with crystallising annual gains in this way doesn’t exceed the tax saved.

The cost of the reduced exempt amount

Compared to this year, clients with income over the higher rate threshold and gains above the new allowance could be paying up to an extra £1,260 in 2023/24, with the prospect of a further £600 the following year. For basic rate taxpayers, these amounts halve to £630 and £300 respectively. And, of course, these amounts may be higher still if the capital gain is from the disposal of residential property which are taxed at 18% and 28%.

The cut to the exemption will have an even bigger impact for trustees who already only receive half the annual exempt amount and pay CGT at the higher rate of 20%. This will see the exempt amount cut to £3,000 for 2023/24, falling to £1,500 from the following April.

Allowance or administrative threshold?

The need to increase tax revenues has brought the annual exempt amount and how it's being used into sharp focus. The purpose of the annual exempt amount was discussed in a recent Office of Tax Simplification (OTS) review of CGT. Is it there to act as an administrative de minimis threshold to reduce the number of individuals needing to report capital gains? Or had it in fact become a substantive relief similar to the income tax personal allowance?

HMRC data suggested that the exempt amount was in many cases being treated as an ‘allowance’, with a significant spike in the number of taxpayers who had gains just under the annual exempt amount every year. It was also identified that the vast majority of these gains related to disposals of shares and investment funds.

Things to consider before tax year end

These findings don't come as a surprise. 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.

But with the tax benefit of this approach set to reduce over the next two tax years, it means taking advantage of the £12,300 on offer this year even more important. But there are several things to be mindful of when making disposals:

Previous disposals
Gains (or losses) may have already been made when rebalancing portfolios or making disposals for other reasons, and these must be considered before making further disposals.

Losses
Where losses have been made in the current tax year, these must be set against any gains before applying the CGT allowance. For example, if a client has gains of £20,000 and losses of £15,000 in the same tax year, £7,300 of the CGT allowance will be wasted (£12,300 - £5,000).

Further gains of £7,300 would therefore have to be crystallised to benefit from the full allowance.

If, however, the losses are brought forward from previous years, not all of those losses have to be used in the current year. In the example, had the £15,000 losses been made in earlier years, only £7,700 would need to be used in conjunction with the £12,300 allowance, allowing the remaining £7,300 of losses to be used to offset gains in future years together with the lower allowance.

Share matching rules
An individual may be forced to dispose of a favoured fund to create the gain needed to use up the CGT allowance. Should they wish to repurchase the same fund, they will need to wait 30 days. If they buy back within this period, the gain will be recalculated by substituting the original cost with the repurchase cost, probably resulting in a smaller gain which doesn’t fully utilise the CGT allowance.

30 days may not be an acceptable time for clients to be out of the market. There are some options to counter this. They could buy back a similar fund, even switching back to their favoured fund after 30 days have passed.

Alternatively, the same fund could be repurchased via the client’s ISA or SIPP if this is possible with the provider – commonly referred to as a ‘bed and ISA’ or ‘bed and SIPP’ exercise. Both of these are disposals for CGT, but repurchasing in this way does not trigger the share matching rules.

Using a partner’s allowance
Where a spouse or civil partner has an unused CGT allowance, assets can be transferred between partners to potentially double tax free gains realised, up to £24,600 this year.

Transfers between partners are technically regarded as disposals, but without a gain occurring at the time of transfer (referred to as a ‘no gain, no loss’ basis). This means that the transferee receives the funds at the acquisition cost of the transferor and a gain can be realised on subsequent sale.

The impact in future years

A greatly reduced allowance will have a much bigger impact on those who used it year on year than someone with a large one-off capital gain. With only £3,000 of tax-free gains available from April 2024, 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. But with a maximum tax saving of £600 from a £3,000 exemption, is the exercise still worth it? For higher rate taxpayer with a portfolio of £250,000, that’s still effectively the equivalent of a 24 BPS reduction. So there may still be value in it, especially if the process can be automated to eliminate a significant slice of the time and costs involved.

Reporting

The lower allowance may mean that there are more clients with excess gains over the allowance.

If total taxable gains exceed the capital gains tax annual allowance, they must be reported via self-assessment and tax paid by 31 January in the tax year following the year the gain was made.

If total taxable gains are reduced to less than the annual exemption by losses meaning no tax is due, self-assessment must still normally be completed to claim and use the losses.

Alternatively, if a client is eligible, tax can be reported and paid using the ‘real time’ Capital Gains Tax Service by 31 December following the end of the tax year of the disposal.

The exception to the above deadlines is where gains arise from the sale of residential property, in which case the gains must be reported and tax paid within 60 days of the sale. However, where gains are made on the sale of residential property in the same year as other gains, the CGT allowance can be used against the residential property gains first, which benefits the taxpayer as these will be taxed at the higher CGT rates of 18% and 28%.

Even if there is no tax to pay, those who don't routinely complete a self-assessment return will still need to report their gains to HMRC if the sale proceeds are more than four times the annual allowance. This year the four times limit is £49,200, but from next year this will become a fixed amount of £50,000. It's also likely that the cuts to the dividend allowance over the next two years to £1,000 and then £500 will mean that more individuals will have to register for self-assessment anyway.

Summary

Cuts to the CGT annual allowance potentially means that more clients will be dragged into the CGT net. They will also need to be aware of their reporting obligations as this may not have been on their radar before.

Advice will be key to help those trying to maximise this year’s allowance, and in keeping future years liabilities to a minimum.

* OTS CGT review – first report