Capital gains tax planning with shares

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*For Financial Adviser use only

 

Arguably, it’s easier to do capital gains tax (CGT) planning with units in a unit-trust or with quoted shares than with most other types of assets. The tax position is easier to control, as an investor can sell just enough shares or units to crystallise more or less the exact gain they’re looking to yield or the loss they’re looking to realise. Why is this the case? Usually they’d be forced to sell a buy-to-let property or other assets in their entirety to realise cash rather than in smaller parcels. Also unlike with unquoted shares, there’s a ready market for quoted shares and unit trusts.   

How is the capital gain or loss calculated?

The gain or loss on the sale or gift of an asset would normally be calculated as the difference between the market value or the sales proceeds received, less the cost attributed to the asset.

The cost of the shares has to be adjusted for equalisation payments received and dividends reinvested over the period the shares are owned.

In contrast to other assets, there are special matching rules which apply to the cost used in the calculation of the capital gain or loss, where shares are sold. These rules are commonly referred to as the ‘bed and breakfasting rules’. They were introduced to stop people selling shares and then buying them back, immediately crystallising a gain to make use of their CGT annual exemption or realising a loss to offset against other gains. When shares are sold, the cost used in the calculation will be calculated in the following order:

  • the cost of shares in the same company/unit trust and of the same class bought back on the same day;
  • the cost of shares in the same company/unit trust and of the same class bought back in the 30 days following the date of disposal; or
  • the average cost of the shares.

The same day or 30 day rule doesn’t apply:

  • where the sale and purchase are more than 31 days apart;
  • where an investor sells shares held in their own name and the same shares are then bought within their ISA or their SIPP either immediately or shortly afterwards; or
  • where one spouse sells shares and they’re bought back by the other.

What is the current rate of CGT?

Since 6 April 2016, the rates are as follows:

  Basic rate taxpayerHigher rate or additional rate taxpayer
Residential property (apart from the main residence) 18% 28%
Other assets 10% 20%

Under what circumstances would CGT not be payable?

An individual isn’t liable to CGT:

  • where they transfer assets to their spouse and they’ve been living together in that particular tax year;
  • when they die - as their estate is subject to inheritance tax, the capital gain up to the date of death is exempt from CGT;
  • where their net capital gains in the tax year are covered by the annual exemption (£11,100 for the tax year 2016/17); or
  • if they’re non-UK resident for more than five years and they dispose of an asset while they’re resident overseas – the gain might be subject to tax in this foreign jurisdiction though. 

What CGT planning opportunities are available?

An investor could consider the following actions.

  • Making use of their annual CGT exemption in the year. If the allowance isn’t used in the year, it’s wasted as it can’t be carried forward.
  • Delaying the disposal or sale to a tax year where they are a basic rate taxpayer, so the gain is subject to tax at 10% rather than 20% if a disposal is going to result in CGT being payable.
  • Delaying the realisation of losses. Losses arising in the tax year are offset against capital gains first before the annual exemption is deducted. An investor will have to be careful not to waste some or all of the annual exemption in the year, by generating losses where the gains would otherwise fall within the annual exemption.  

Conclusion

Managing a client’s CGT exposure can be complicated. But this whole process can be made simpler where the platform you’re using has a capital gains tax tool available. Our CGT reporting tool helps you manage CGT liabilities for your clients with Aegon Retirement Choices’ General Investment Accounts. You can see a quick overview of the tool on our website.

To find out more speak to your usual Aegon Sales Consultant.