CAPITAL GAINS TAX - PLANNING - 05.02.2010

Don’t throw away your CGT exemption

I don’t want to sell

If you own shares that are worth more than you paid for them, you could have Capital Gains Tax (CGT) to pay when the time comes to sell them. That may be one reason you’re hanging on to them. Or it may be that you think they’ll continue to grow in value, but that may be at a price.

Saving for the future

The Taxman allows you to make some tax exempt capital gains each year; for 2009/10 the figure is £10,100. So, for example, if you own shares worth £18,000 that cost £12,000, you may think that you don’t need to worry about CGT. After all, it’s only a £6,000 gain, and that’s well within the exemption. But if, in five years’ time, the gain has ballooned, so that it exceeds your exemption, you could be lumbered with an unexpected tax bill.

Example - part 1. Jamie bought shares in Choc Ltd costing £12,000 in 1996. In March 2010 Choc is taken over and Jamie receives £25,000 for his shares. He’s already used his annual CGT exemption against other gains and so the whole of the £13,000 gain on Choc is taxable at 18%, giving a tax bill of £2,340. But it could have been avoided entirely.

Boosting the cost

In years where Jamie hadn’t used some or all of his CGT exemption he could have sold Choc shares and bought them back shortly afterwards. This would have boosted the CGT cost of the shares and so ultimately reduced his tax bill.

Example - part 2. In 2008/9 Jamie sold all his Choc shares for £21,000 (the cost was £12,000) making a gain of £9,000. He had no other gains in that year. His CGT exemption covered the gain so there was no tax. A month later he bought back the shares for £21,200. The CGT cost of his shares was uplifted to £21,200. When the takeover happens in 2009/10 his gain will only be £3,800 and the tax on this just £684, saving him £1,656 (see The next step).

Trap. Broker’s fees for selling shares start from around £15 per transaction. There’s also Stamp Duty on re-purchasing the shares at 0.5% of the cost. These expenses will eat slightly into your tax saving. And there could be another problem...

No boost available

If you sell shares and repurchase them within 30 days, the Taxman ignores the original cost. Instead, the gain or loss is treated as the difference between the sale and the subsequent repurchase price. That means the original cost-boosting scheme won’t work. But if you wait 31 days to buy them back, the price could have leapt. What are your options?

Tip 1. Married. On the day that you sell your shares your spouse can purchase an identical shareholding. After 31 days he/she can transfer them to you and you’ll be treated as buying them at the same price as your spouse. The 30-day trap won’t apply and you’ll have boosted the cost of your shares without ever being out of the market.

Tip 2. Not married. Sell the shares and buy others in the same industry sector, as these are likely to perform similarly. You can sell these and buy back the original type of shares after 30 days.

To see the calculation of the figures in the example above, visit http://tax.indicator.co.uk (TX 10.09.04).