Capital gains tax (CGT) is payable on the sale not only of stocks and shares but also of anything other than household goods and personal effects up to the value of £6,000 and private motor vehicles. Subject to certain exceptions, you do not pay CGT on any gain you make when you sell your home. Nor, on the other hand, can you set off any loss against gains made elsewhere.
Capital losses are set off against capital gains in the same tax year and after that there is an annual exemption, currently £7,500. As a result, few people pay CGT.
If the net result of a year's transactions before the annual exemption is a loss, it can be carried forward to succeeding years. The annual exemption cannot be carried forward, but can be applied to the net gains for a year before any loss brought forward which, if not then used, can be carried forward again.
The following investments are exempt from CGT:
gilt edged stock
company debentures and loan stocks
friendly society savings schemes
ISAs and PEPs
company share option schemes
enterprise investment schemes and venture capital trusts
commercial forestry
As with tax on income, investments which are free of capital gains tax need to be good investments in their own right. A taxed gain is better than no gain at all.
Indexation and taper relief
For purchases before April 1998 the cost can be indexed, that is adjusted by the cumulative rate of inflation (RPI) between purchase and April 1998. However, indexation cannot be taken beyond breakeven, i.e. it cannot be used to create a loss.
If you held any shares before 6 April 1998, it is a good idea to calculate the indexed cost now, as it will not change. This can be done by using the CW indexation allowances for April 1998, available in Inland Revenue leaflet CGT1, which can be obtained from your local tax office.
From April 1998, indexation was replaced by taper relief which is based on the length of ownership. It only applies to shares held for at least three complete years, although an extra year is added to the total for shares owned on 17 March 1998.
The percentage of the gain chargeable reduces to 95% after the third complete year and by a further 5% for each successive year, to a minimum of 60% after ten complete years.
For example, if you bought shares in August 1996 and sold them in June 2001, the taxable gain would be calculated as follows:
The original cost would be increased to 5 April 1998 in accordance with the CW indexation allowance for the period, to give the indexed cost.
The excess of the selling value over the indexed cost gives the taxable gain before taper relief.
Although the shares have only been held for two full years since April 1998, as the shares were held on 17 March 1998 an extra year is added, making a total of three years, so taper relief reduces the chargeable gain to 95%
More favourable taper relief applies to business assets, and since 6 April 2000 it also applies to all shares owned in your employing company and to all shares in unquoted and AIM quoted companies.
The percentage of the gain chargeable in this case reduces to 87.5% after the first complete year, to 75% after two years and 50% after three, to a minimum of 25% after four years.
Where shares qualify as business assets only from 6 April 2000, the gain for shares owned on that date has to be apportioned between the two periods.
Calculating the taxable gain
The method of calculating the chargeable capital gain, following the introduction of taper relief.
The complications of indexation and taper relief can be ignored if your gross gains for a year do not exceed the annual exemption, currently £7,500.
Reinvestment relief
Chargeable gains on disposals can be deferred indefinitely if the amounts realised are reinvested in new share issues from qualifying companies under the Enterprise Investment Scheme.
Tax payable
The net chargeable gain for the year is added to your income and is taxed at 10% if any falls within the personal allowance or the 10% band, at 20% for any within the basic rate band (not 22% as for income) and 40% thereafter. CGT liability cannot be set against personal allowances.
Annual planning
This is mainly a matter of ensuring you make use of your annual tax free allowance.
You should keep a running record of your sales during each financial year (starting 6 April), with a note of the gain or loss, after adjusting for indexation and taper relief.
Check on the cumulative position at the beginning of March. If you have a substantial amount of your annual allowance still available, then take a look at the unrealised gains in your portfolio.
Bed and breakfasting
Before 17 March 1998, any unused annual allowance could be applied to unrealised gains before the end of the tax year by selling the shares one day and buying them back the next. This has been stopped by introducing a minimum 30 day interval between selling and buying back, otherwise the two transactions will be ignored for CGT purposes.
It is of course possible to take the risk of being out of the market for 30 days.
Other alternatives are:
If you have not used all your current year's ISA allowance or have uninvested amounts in a PEP, then you can 'bed and ISA' or 'bed and PEP', that is buy back into an ISA or PEP.
If you are married you can sell and your spouse buy back (or vice versa).
You can buy a similar share (e.g. BP for Shell) or your best choice of new investment.
In all these alternatives the sale and buy back can be done simultaneously, so there is no risk of adverse price movement overnight.
The disadvantage is that costs of both selling and buying (including stamp duty) are incurred, although some stockbrokers will forgo some or all of their commission on the second transaction. Also you lose the difference between the buying and selling prices.
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