Using the Capital Gains Tax (CGT) annual exemption

Taxable capital gains are added to the investor’s other taxable income to determine the rate of CGT they pay. To the extent they fall within their basic rate tax band they are taxed at 18%. To the extent they exceed it, they are taxed at 28%.

The annual exemption is deducted before determining taxable capital gains. For individuals the annual exemption is £10,600 for 2011/12 and £5,300 for most trustees; and has been frozen at these levels for 2012/13. For higher and additional rate taxpayers who will otherwise pay CGT at 28%, use of the annual exemption has potentially become more valuable and can now save up to £2,968 in tax. For a basic rate taxpayer the tax saving is worth up to £1,908.

As far as possible it is important to use the annual exemption each tax year because, if unused, it cannot be carried forward. If the annual exemption is not systematically used an individual is more likely to reach a point where some of their gains are subject to the tax. In using the annual CGT exemption, unfortunately a gain cannot simply be crystallised by selling and then repurchasing an investment – the so-called bed-and-breakfast planning – as the disposer must not personally reacquire the same investment within 30 days of disposal. However, there are other ways of achieving similar results:

– Bed-and-ISA. An investment can be sold, eg. shares in an open-ended investment company, and bought back immediately within a tax free ISA. For 2011/12 the maximum ISA investment is £10,680. This increases to £11,280 in 2012/13.

– Bed-and-SIPP. Here the cash realised on sale of the investment is used to make a contribution to a self-invested personal pension (SIPP) which then reinvests in the original investment. This approach has the added benefit of income tax relief on the contribution and may also offer a higher reinvestment ceiling than an ISA, depending on a person’s earned income and other pension contributions.

– Bed-and-spouse. One spouse can sell an investment and the other spouse can buy the same investment without falling foul of the rules against bed-and-breakfasting. However, the sale of the investment cannot be to the other spouse – the two transactions must be separate.

– Bed-and-something similar. Many funds have similar investment objectives or, in the case of tracker funds, identical objectives. So, for example, if somebody sells the ABC UK Tracker fund and buys the XYZ UK Index fund, the nature of the investment and the underlying shareholdings may not change at all, but because the fund providers are different the transactions will not be caught by the rules against bed-and-breakfasting.

If you have any questions regarding capital gains and tax planning, please contact us on 020 3865 2379

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