Rules of the capital gain

TAX PLANNING

CONVENTIONAL wisdom has it that capital gains tax is the tax that fails to bite, writes Anthony Bailey.

Critics of the tax argue that it is over-complicated, expensive to administer, and raises relatively little revenue. They say it distorts investment decisions and the efficient use of capital. People facing tax bills are reluctant to sell investments for fear of crystallising a tax liability.

Yet CGT is still a reality for those who have to pay it. It is a tax on the rise in value of most assets. Of concern to many people will be the rise in value of investments such as shares and unit trusts and also second homes (first homes are generally exempt). Investors in particular need to master the rules to minimise or eliminate the bill.

The two key elements of CGT planning are the annual exemption - the gains you can make before you become liable for tax - and the indexation rules, which make purely inflationary gains tax free.

The annual exemption is £5,800, rising to £6,000 on 6 April. Gains within the exemption are tax-free. An investment may rise in value over several years, but the exemption can be used only in the year the investment is sold (or given away).

If the exemption is not used within the tax year it is lost and cannot be carried forward. That is why anyone who is likely at some time to breach the threshold should consider realising enough gains before 5 April to get £5,800 of them tax-free.

That can mean one of two things. If, for example, some shares are due to be sold soon, it may be beneficial to bring the sale forward to the current tax year.

But for people who are happy with their existing investments, the end- of-tax-year alternative is to bed-and-breakfast shares or unit trusts, selling them one day and buying them back the next. Most stockbrokers and many unit trust companies offer special rates for this sort of deal.

Shares that cost £6,000 and are now worth £11,000 could be sold and rebought. A gain of £5,000 is realised, no tax is payable, and when those shares are next sold the starting value for CGT will be £11,000 instead of £6,000.

Any capital losses can be set against gains, so people who have already realised substantial gains in the current tax year can consider realising a loss - either through the bed and breakfast route or by selling for good the loss-making shares.

The principle is simple enough, but care needs to be taken to choose the right investments. In particular, the monetary gain showing on a specific share or unit trust will be more than the gain for CGT purposes once inflation has been taken into account.

In calculating a taxable gain the initial cost of the shares can be increased by an indexation allowance. The allowance measures the rise in the retail prices index between the month of purchase and the month of sale. If the RPI has risen by 30 per cent, the tax-free allowance on shares costing £1,000 would be £300 - that is, on top of the annual exemption.

It used to be possible to use the allowance to turn a gain into a loss, or to increase a loss. Now it can be used at most to eliminate a monetary gain. However, purely "indexed losses" of up to £10,000 can be claimed on disposals of shares and other assets made between 30 November 1993 and 5 April 1995.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
Under the skin: Sarah Kane in May 1998
theatreThe story behind a new season of Sarah Kane plays
Arts and Entertainment
Preening: Johnny Depp in 'Mortdecai'
filmMortdecai becomes actor's fifth consecutive box office bomb
Sport
Bradford City's reward for their memorable win over Chelsea is a trip to face either Sunderland or Fulham (Getty)
football
News
Lars Andersen took up archery in his mid thirties
video
Voices
Focus E15 Mothers led a protest to highlight the lack of affordable housing in London
voicesLondon’s housing crisis amounts to an abuse of human rights, says Grace Dent
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Client Services Manager - Relationship Management - London

£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

Recruitment Genius: Credit Controller / Customer Service

£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

Guru Careers: In-House / Internal Recruiter

£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Day In a Page

Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore
'I'm gay, and plan to fight military homophobia'

'I'm gay, and plan to fight military homophobia'

Army general planning to come out
Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
America: Land of the free, home of the political dynasty

America: Land of the free, home of the political dynasty

These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
A graphic history of US civil rights – in comic book form

A graphic history of US civil rights – in comic book form

A veteran of the Fifties campaigns is inspiring a new generation of activists
Winston Churchill: the enigma of a British hero

Winston Churchill: the enigma of a British hero

A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
Growing mussels: Precious freshwater shellfish are thriving in a unique green project

Growing mussels

Precious freshwater shellfish are thriving in a unique green project