The Capital Gains Tax exemption has been a critical tax year end planning consideration for some time. But changes are looming, and further opportunities to take advantage of this valuable exemption may be limited.
The Chancellor commissioned the Office of Tax Simplification to look at simplifying CGT with a view to also consider areas where the existing rules distort behaviours.
The OTS report recommends that the annual CGT exemption should be cut from its current level of £12,300 to somewhere between £2,000 to £4,000. It also suggested that CGT rates should be more closely aligned to income tax, which could see the rate of tax on gains in excess of the exempt amount doubled from the current rates of 10 per cent (basic rate) and 20 per cent (higher rate) to 20 per cent and 40 per cent.
If the proposals are given the greenlight, with the exemption cut to £2,000, a higher rate taxpayer with a capital gain of £12,300 would pay £4,120 in CGT, instead of nothing.
Now, there is no guarantee that the OTS recommendations will be implemented and there is no indication of a timeline.
But, against a backdrop of continued economic disruption, it would be surprising if CGT changes were left on the backburner. It therefore makes sense to ensure the annual exemption is not wasted this tax year.
The current exemption helps those with relatively modest gains avoid the need to report or pay tax.
But it is also an effective way of limiting the gains payable on an investment portfolio. By ensuring enough gains are realised each year to use the allowance, the tax savings can have a significant impact of net investment return.
Here is how to calculate how much of a client’s portfolio needs to be sold to keep gains within the exemption, including guidance on possible acquisition cost adjustments and what to do with the proceeds.
Calculating how much of the portfolio needs to be sold
Step one - Calculate the acquisition cost of the shares/units.
Gains are calculated by deducting the acquisition cost from the disposal proceeds.
The acquisition cost is determined by adding together all the purchase costs (also referred to as a ‘section104’ holding, or ‘pooled’ cost) and dividing this by the total holding to arrive at an average cost per unit/share. This pooled acquisition cost is then deducted from each unit/share sold to determine the amount of gain or loss.
Example:
Dan has 50,000 shares in ABC UK equity Oeic (income shares). He purchased 30,000 shares in April 2009 at £2.00 a share. He purchased a further a 10,000 shares in May 2012 at £2.20 a share and finally 10,000 shares in January 2015 for £3.00 a share.
The average acquisition price for the holding is:30,000 x £2.00 = £60,000
10,000 x £2.20 = £22,000
10,000 x £3.00 = £30,000
Total = £112,000
Acquisition price per share £112,000/50,000 = £2.24
Step two – Determine the gain per share
Once you have the acquisition cost per share it is easy to calculate the gain for each individual share unit by deducting it from the quoted unit/share price on the date of the disposal.
