But by not fully utilising the annual CGT exemption each tax year that could be the cost. At £10,900 for 2013/14, the CGT exemption is worth £3,052 to higher rate taxpayers subjected to 28 per cent on their gains.
There is a monetary argument then for someone with a portfolio that is heavy with capital gains to realise enough gain each year to fully use their exemption. The proceeds can be reinvested, but the gain carried by the portfolio will reduce, and the overall net returns may, therefore, increase. For example, a gain of £54,500 could be cleared completely over a five-year period, even if the exemption remained at £10,900. This could save around £15,000 for a higher rate taxpayer.
In most cases, the calculation of gains since April 2008 is more straightforward than earlier years. The disposal of a complete shareholding is simply matched with the cost of those shares, whenever they were purchased. No indexation, no taper relief.
It gets more complex when only part of a shareholding is sold. If, say, 50 per cent of the shares are sold, then 50 per cent of the total cost of those shares, whenever purchased, is included in the gain calculation.
Of course, there is always an exception, and in this case it is ‘share matching’. It affects those clients who want to sell shares to realise a gain, but want to buy the same shares back – ‘bed and breakfasting’. Shares sold and bought back within 30 days are ‘matched’ – that is, the gain is calculated as the sale proceeds, less the cost of buying them back. The anticipated gain never materialises, and so the exemption may be wasted.
Of course, there is the option to wait 30 days to buy back the shares, but this is 30 days of market fluctuations which, for many, would be an unacceptable risk. So, what can be done to limit this? How do you make the most of the annual CGT exemption while retaining preferred investments and minimising the risk of market movements? Here are some possible solutions:
• Bed and ISA – Sell enough shares so that the gain uses the annual CGT exemption. Then buy as many of the same shares back as possible through a stocks and shares ISA. This will depend on how much ISA allowance is still available. (Full ISA allowance for 2013/14 is £11,520). Checks would also need to be made to ensure the ISA manager is prepared to buy that particular stock or collective.
• Bed and Sipp – Any shares that could not be repurchased through the ISA could be bought back through a Sipp. And the share sale proceeds could be paid in as a contribution. For a higher rate taxpayer, the cost of buying back, say, £5,000 worth of shares would be immediately discounted by the tax relief on the contribution, the net cost being just £3,000.
• Bed and spouse – In a similar fashion, simply sell enough shares to utilise the CGT allowance, but the same shares could be bought back at the same time by the spouse. As a family unit, their investments do not change.