How to take advantage of the 'forgotten' tax allowance

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Julia Grimes
Published: 26 Mar 2019 Updated: 26 Mar 2019

Unlike its complex and headline grabbing cousin, Income Tax, the lesser known and lesser understood tax, Capital Gains Tax (CGT) has long been a valuable earner for the Chancellor. From second homes to pieces of art, investments to family heirlooms, HMRC can take a hefty slice of the gain on the sale of certain assets. Whilst this tax regime is often the cause of large tax bills landing up to 20 months later, the annual exemption brings with it, one of the most beneficial – and underutilised – methods of creating tax-free returns for investors. Ian Dyall, head of estate planning at Tilney, explains:

“For those looking to save tax efficiently, pensions have become more attractive than ever. However, money held in pensions cannot be accessed before age 55, so for many, it is necessary to contemplate other means of saving, and maximising all available tax allowances beyond pensions. Whilst I would always advocate that individuals seek to utilise their annual ISA allowances, those already fully utilising ISAs but with further cash to invest can still benefit from tax-efficient investing through good use of other tax allowances.

“One such allowance that is very under-utilised is Capital Gains annual exemption. Each year an individual can realise up to £12,000 (2019/20 tax-year) in capital gains before tax will become payable. Where a married couple own an asset jointly, a gain of £24,000 (2019/20 tax-year) would need to be realised prior to tax becoming payable. Indeed, the inter-spousal exemption allows assets to pass between partners without being classed as a disposal for CGT purposes. This means that individuals can pass all, or part, of an asset to a spouse who may have more CGT allowance available, or who may be subject to a lower rate of CGT on disposal.

“Many people have, over the course of time, amassed portfolios of funds, investment trusts and shares, and/or investment properties, all of which are assessable to CGT. However, assets only become assessable to CGT when a disposal event occurs, which could be via the sale of the asset or the transfer of the asset to anyone other than a spouse. Unless a disposal takes place, the annual allowance is therefore never called upon, nor can it be carried forward to future years; effectively a valuable benefit lost. As a result, many investors are hit with sizeable tax liabilities when they eventually come to surrender and/or transfer long-held assets to children etc.

“With careful ongoing planning however, some, or all of a portfolio can be sold to fully utilise an individual’s annual CGT allowance - without ever creating a tax liability. The benefit being, that upon reinvestment, the base cost used in the CGT calculation will essentially be reset to a new higher level, thereby reducing potential CGT liabilities in the future. This is how a portfolio of £100,000 achieving a net growth rate of 5% per annum over 20 years, could lead to the investment being valued at £265,329 at the end of the term, and never become subject to capital gains tax (assuming the CGT allowance increases at 2.5% per annum and no other capital gains are realised each year on other investments). On the other hand, an investor in the same scenario who chooses not to utilise their CGT allowance each year, could be liable to CGT of almost £30,000 (based upon today’s prevalent rates) on the total gain made on encashment.

“The above aside, CGT is only (currently) chargeable at 10% for gains falling within an individual’s available basic rate Income Tax band (18% for residential property) and 20% for higher rate and additional rate taxpayers (28% for residential property). This is in comparison to Income Tax on other savings vehicles at 20%, 40% or even 45%. Investments subject to CGT rather than Income Tax are therefore very attractive even ignoring the use of the aforementioned annual exemption.

“Nevertheless, there are other issues to consider. If you crystallise a gain, the proceeds most be reinvested in the same asset before a period of 30 days has elapsed which may mean being out of “of the market”. Of course, the investor could immediately reinvest into an alternative asset, but this may not always be appropriate, or they could reinvest into the same asset as before but through an ISA – a process known as Bed and ISA - where all future returns would be free of tax.

“Ultimately however, in an age when the personal allowance is typically absorbed by earned income and owing to the current squeeze on pension tax benefits, investors must look to alternative methods of making tax savings. The CGT allowance can certainly play a part in an overall, tax efficient portfolio.”


This release was previously published on Tilney Smith & Williamson prior to the launch of Evelyn Partners.