Rules of the capital gain


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
Arts and Entertainment
a clockwork orange, stanley kubrick
The Tesco Hudl2: An exceptional Android tablet that's powerful, well-built and outstanding value

Sarah Silverman (middle) with sister Reform Rabbi Susan Silverman (right) and sister actress Laura Silverman (left) at Jerusalem's Western Wall for feminist Hanuka candle-lighting ceremony
peopleControversial comedian stages pro-equality Hanukkah lighting during a protest at Jerusalem's Wailing Wall
After another poor series in Sri Lanka, Alastair Cook claimed all players go through a lean period
Arts and Entertainment
The Bach Choir has been crowned the inaugural winner of Sky Arts’ show The Great Culture Quiz
arts + ents140-year-old choir declared winner of Sky Arts' 'The Great Culture Quiz'
Life and Style
food + drinkAuthor DBC Pierre presents his guide to the morning after
Life and Style
food + drink
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Day In a Page

Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

Paul Scholes column

It's a little-known fact, but I have played one of the seven dwarves
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas