Techzone

Crystallising gains up to the CGT annual exemption has been a regular staple of tax year end planning for many years. The annual exemption is currently worth up to £2,460 a year for a higher rate taxpayer. But the phrase ‘use it or lose it’ may take on even greater significance this tax year, with possible cuts to the exemption and increases to the rate of CGT potentially on the horizon. Our new tax year end guide to utilising the annual CGT exemption may help you and your clients - taking you step by step through the practical application.

Potential cut the exemption looming

A report by the Office of Tax Simplification (OTS) recommended that the government should cut the annual exemption from its current level of £12,300 to somewhere between £2,000 to £4,000. They believe that the policy objective for the annual exempt amount is to keep those individuals with occasional small gains out of the need to pay tax or report those gains. However, evidence shows that the exemption is being used as an opportunity to take gains tax free and re-investing the proceeds.

A possible increase to CGT rates

The OTS have also suggested that CGT rates be more closely aligned to income tax rates. This could see the rate of tax on gains in excess of the exempt amount doubled from the current rates of 10% (basic rate) and 20% (higher rate) to 20% and 40%.

If both these proposals were to be given the green light, it could mean a higher rate taxpayer with a capital gain of £12,300, which would currently be tax free, paying £4,120 in CGT. 

£12,300 - £2,000* = £10,300 @ 40% = £4,120

* Assumes the AEA cut to £2,000

But if rates are to be aligned with income tax, the OTS also recommend that only gains above inflation are taxable. This was previously the case in the days when we had indexation allowance or taper relief and the return of a similar mechanism for removing inflationary gains may be under consideration.

We can help show you how to do it

It clearly makes sense to ensure that the annual exemption is not wasted this tax year. Some platforms may have CGT calculators to work out the gains when assets are sold and some may even help identify how many shares may need to be sold to maximise the annual allowance. However, our tax year end guide to utilising the annual CGT exemption explains what will be happening behind the computations and give you all you need to know on:

• how to calculate how much of a client’s portfolio needs to be surrendered to keep the gain within the available exemption
• why the acquisition cost may need to be adjusted when income is reinvested
• when the share matching rules can undo your tax planning
• how to avoid clients being out of the market for 30 days

Summary

There are no guarantees that the OTS recommendations will be taken on board or from what date. However, it's important to remember that the OTS report was commissioned by the chancellor in July 2020, with specific instructions to look at areas where the existing rules can distort behaviours.