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Utilising your Capital Gains Tax Allowance

| Tax | By Joshua Collis

Capital Gains Tax (CGT) is a lovely problem to have. You’ve bought an asset, it’s grown in value while you’ve owned it and, on selling, you’ve turned a profit…lovely! But what about that tax?

Now, without getting bogged down in the various technicalities on the types of assets that CGT applies to, I’ll simplify by saying that this article will be talking about CGT in terms of investing in a managed equities portfolio. Different rules apply regarding property, antique cars, fine wine (even foul wine) and so on.

The Basics

Every individual in the UK has an annual CGT exempt amount (£12,000 for the 2019/20 tax year), which essentially means that the UK Government will allow you to make £12,000 on the sale of assets every year before CGT is applied. This is halved to £6,000 per annum for trusts.

Some investment wrappers are exempt from CGT altogether, the mainstream ones being ISAs and pensions. Should your equities not be held in these tax efficient vehicles, we need to follow these steps;

1. Work out how much taxable income you have
2. Work out your total taxable gains
3. Deduct your CGT Allowance
4. Add this to your taxable income

If the total amount is within the basic income tax band (up to £37,500 for the 2019/20 tax year after deduction of any personal allowance), you’ll pay 10% on your gains and 20% on any amount above the basic tax rate.

These tax rates, you’ll be happy to note, are far more favourable than the current income tax rates.

It comes and goes

CGT allowance is a ‘use it or lose it’ policy, so each year, whether you utilise the allowance or not, it is reset to the rate set out in the Budget.

“Why is this important to me?” you may be asking. Well, diligent use of your CGT allowance can put money in your back pocket when the time comes to draw on your capital.

Effective management

By understanding clients’ circumstances and goals, Courtiers can actively manage investments to minimise the impact of CGT. As an example, through some cogent investment planning and three investment platforms (SIPP, ISA and Collective Investment Portfolio), we tailored a client’s annual income in such a way that on a total of £150,000, the effective rate of tax payable was significantly reduced. The wealth management strategy included using the client’s entitlements and allowances including their pension tax-free lump sum entitlement (referred to as pension commencement lump sum, or PCLS), their 20% Income Tax bracket and vitally, their CGT Allowance. Utilising these, it is possible to draw on the original capital and the growth on this capital throughout the year to create a tax efficient income source.

Result

As is the objective with most of the strategies we design and manage for clients, the client can enjoy a larger slice of their investment pie, maximising the value of their portfolios to draw down from or pass to their heirs, whilst enjoying a suitable lifestyle in retirement.

If you would like to know more about how we help clients manage their CGT allowances throughout the year, please contact us.

Joshua Collis

Trainee Adviser

Please note that tax treatment depends on individual circumstances and may be subject to change in the future.

Warning – the views expressed by Courtiers in this summary and any video and video transcripts, are reached from our own research. Courtiers cannot accept responsibility for any decisions taken as a result of reading this document, watching the featured video or reading the video transcript and investors are recommended to take independent professional advice before effecting transactions. The price of stocks, shares and funds, and the income from them, may fall as well as rise. Past performance is not necessarily a guide to future returns.

We do not endorse nor accept responsibility for the content of any website not operated by Courtiers which you may visit by following a link from this article.

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