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The Capital Gains Tax (CGT) exemption is a valuable allowance. At £10,900 for 2013/14, it's worth £3,052 to higher rate taxpayers paying tax at 28% on their gains.
But it's a 'use it or lose it' allowance. It can't be carried forward.
There's a monetary argument for investors sitting on an investment portfolio with significant capital gains to realise enough each year to fully use their exemption. The proceeds can be reinvested, but the accrued capital gains within the portfolio will reduce.
For example, a gain of £53,000 could be cleared completely over a 5 year period if the exemption remained at £10,900. This could save around £15,000 for a higher rate taxpayer.
So how can you make the most of the annual CGT exemption while retaining your favourite investments and at the same time minimise the risk of market movements?
Bed and ISA. Sell enough shares/units so that the gain uses the annual CGT exemption. Then buy as many of the same holdings back as possible through a stocks and shares ISA. Obviously this will depend on how much of the ISA allowance you have left for the tax year (full ISA allowance for 2013/14 is £11,520). Checks would also be required to ensure the ISA manager is prepared to buy that particular stock or investment fund.
Bed and Pension. It may be possible that any holdings that could not be repurchased through an ISA could be bought back through a pension arrangement, for instance, a Self Invested Personal Pension Plan (SIPP) - the sale proceeds could be paid in as a pension contribution. For a higher rate taxpayer, the cost of buying back say, £5,000 worth of shares/units would be immediately discounted by the tax relief on the contribution, the net cost being just £3,000 after higher rate tax relief has been reclaimed.
Bed and spouse. In a similar fashion, an individual could sell enough shares/units to utilise their CGT allowance, but the same shares could be bought back at the same time by their spouse. Therefore, as a family unit, their investments don't change.
And don't forget…
The savings described above can be doubled if you can make use of both your own and your spouse's/civil partner's unused annual exemption. The transfer of assets to a spouse does not result in a chargeable gain and the spouse will therefore acquire the shares at the original cost, so if you do wish to retain the same shares, you can both use the 'bed and ISA' and/or 'bed and pension' solutions described above.
Importantly, make sure that gains created on other disposals during the year are taken into account when assessing how much of the annual exemption is available.
If you’re selling accumulation shares/units in a collective investment, all the income that has been re-invested can be added to the effective cost. As such this reduces the gain, whereas income re-invested from 'income' shares buys new shares, so no adjustment is necessary.
In summary, this can be a complex but very worthwhile exercise and as always, I strongly recommend seeking professional tax and investment advice.
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