As the tax year draws to an end, the window is closing for clients to make the most of the capital gains tax annual exemption. David Downie, technical manager at Aberdeen Adviser, looks at what paraplanners need to consider in their planning, given reduced exemptions and increased tax charges which now apply.
The opportunity for tax-free gains is less this year than in years gone by. The exemption, which was cut from £12,300 to £6,000 last year, has been reduced further to just £3,000 in 2024/25. Meanwhile, CGT rates were increased in the Autumn Budget. Disposals made on or after 30 October 2024 will be taxed at 18% for basic rate taxpayers and 24% for everyone else respectively – up from 10% and 20% before.
With a reduced annual exemption and mid-year rate increase it is important for paraplanners not to overlook year end planning opportunities and fall foul of the potential tax pitfalls.
Here are a few points to bear in mind.
Reviewing disposals and offsetting losses
Reviewing any disposals made since 6 April 2024 is essential to determine whether the CGT exemption has been fully used. Many clients may have realised gains earlier in the year through asset sales or portfolio rebalancing.
If a client has exceeded the annual exemption, it will be important to consider which disposals they have counted against the allowance. Clients can pick and choose, and it may be to their advantage to do so, particularly given the CGT rate change – matching the exemption to disposals made after 30 October will reduce the overall tax due in the year.
Capital losses should also be factored into CGT planning. Losses incurred in the same tax year must be offset against gains before the annual exemption is applied. If total losses exceed total gains, the exemption may be wasted, as there would be no taxable gain to apply it against. Clients should check whether their gains exceed losses by at least £3,000 to ensure the exemption is used effectively.
Losses from previous years can also be carried forward and strategically applied to offset potential future gains. And, as with the annual exemption, taxpayers can choose to use losses against disposals made on or after 30 October 2024 if this is to their advantage.
Maximising tax efficiency through spousal transfers
Clients may be able to double their CGT exemption to £6,000 this year if they are able to transfer assets to their spouse or civil partner.
If a client’s spouse has not used their allowance, then investments with a gain can be transferred to them and then disposed of before 5 April. While the transfer between partners is technically a disposal, there is no gain on this transaction – something commonly referred to as a no gain/no loss basis. This effectively means that the receiving partner receives the investments at the original cost.
Navigating share matching rules and staying in the market
The share matching rules must also be carefully considered to make the most of available exemption.
If a client sells shares and repurchases the same ones within 30 days, the gain is calculated using the repurchase price rather than the original acquisition cost. Where there has been little movement in price between date of sale and date of repurchase, the result may be that the gain is negligible, and so the allowance wasted.
Clients who want to manage this risk without having to exit the market might consider repurchasing shares within an ISA or SIPP. This allows them to maintain market exposure while ensuring that future gains are sheltered from CGT.
Calculating the ‘pooled’ cost
When making a disposal of assets in a general investment account (GIA), the acquisition cost of the investments disposed must be calculated.
In instances where there have been multiple purchased on separate dates, then it’s the average – or ‘pooled’ – cost that needs to be identified.
If only disposing of part of a holding, then the same proportion of the pooled cost must be calculated to work out the gain – i.e. if the disposal amounts to 25% of the total value of the holding, then 25% of the cost pool must also be identified to work out the gain. The pooled cost will also include income distributions reinvested and used purchase more shares. However, if accumulation shares are held, income is automatically reinvested and increases the value of each share – it’s not used to purchase new shares or units. The amounts reinvested must therefore be identified and included in the cost pool which, ultimately, will reduce the gain made on their disposal.
Don’t overlook ‘equalisation payments’
If a client makes investments in shares or units between distribution dates and before the ‘ex-dividend’ date, the cost of a purchase is reduced by an ‘equalisation payment’, because they haven’t been invested for the whole period over which the distribution has been earned.
This is essentially a return of capital. To reflect this, the amount to be included in the tax pool is the amount invested, minus the equalisation payment. This is important to check, as the resulting gain might therefore be slightly more than expected.
Inherited shares
If a client inherits shares due to death of a spouse, the amount included in the cost pool is usually the value of those shares on the date of death.
If shares are jointly owned and one owner dies, the cost pool will reflect that there has been what’s known as the CGT ‘uplift’ on the first death – the acquisition cost for the surviving individual will be 50% of the value at the date of death, and 50% of the original death.
If the market price has risen since death, this will help reduce the gain. And, if market prices have risen, potentially increases losses available to offset other gains.
Pension contributions and reporting gains
Clients might also be able to benefit from making a pension contribution to a personal pension or SIPP. This will extend the basic rate band by the gross amount paid, and could mean that some or all of a gain becomes taxable at the lower rate.
Finally, there are new reporting limits to be mindful of. Even if the gain is below the £3,000 exemption, a tax return will be required if the total proceeds of sale exceed £50,000.
Plan, plan, plan
With only £3,000 of tax-free gains available this year, common tasks, such as rebalancing portfolios, will more frequently result in CGT becoming payable. And, given, that managing gains within the exemption can be time consuming and costly, is CGT management really worth it?
It could be, particularly if the process can be automated or streamlined to reduce admin resource. There’s a potential tax saving of £720 from a £3,000 exemption for a higher rate taxpayer.
As always, paraplanners will play a central role in helping clients make the most of the options at hand and achieve the best possible outcomes.
Main image: joanna-kosinska-1_CMoFsPfso-unsplash
