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Capital gains

Adrian Mooy - Tuesday, February 11, 2020
 
If you’re lucky enough to own shares which have increased in value you might be liable to capital gains tax (CGT) if you sell or transfer them. Working out the taxable gain isn’t always as easy as comparing how much the shares cost you with the amount you receive from selling them. When you buy or acquire shares of the same type in the same company at different times, their cost for CGT purposes is averaged. This is known as pooling.
 
Pooling can work for or against you. Shares on which you think you’ve made a loss or a small gain could show a large gain for tax purposes, or vice versa.
 
Example - part 1. In 2004 Ali bought 10,000 10p shares in Acom Plc for £12,000. He inherited a further 5,000 shares from his father in 2007 when they were worth £2.20 each and bought 1,500 more in 2018 for £6,500. In January 2020 Ali sold the 1,500 shares for £10,000. Ali assumes he’s made a capital gain of £3,500 (£10,000 less £6,500). But because all his shares in Acom are pooled and their costs averaged, the taxable gain is actually £7,818.
 
Using your annual exemption

 

If Ali made no other capital gains in 2019/20 he would not have to pay tax on his gain from selling his Acom shares because it would be less than the annual CGT exemption, which is £12,000 for the year. But if he had already made gains from selling other assets his miscalculation could result in an unexpected tax bill. Note. If Ali had made capital losses in 2019/20 these reduce the amount of taxable gains before applying the exemption.
 
Example - part 2. Prior to selling the Acom shares, Ali had made a capital gain of £8,000 from selling a property. He had assumed the gain on his Acom shares of £3,500 would push his total gains to £11,500, i.e. within the CGT exemption with a little to spare. But actually his taxable gains are £15,818 (£8,000 + £7,818) meaning that he’ll have to pay tax on £3,318 (£15,818 - £12,000 exemption).

 

CGT efficiency

 

Selling assets to utilise your annual CGT exemption is good tax planning. It prevents large gains building up in shares and so can significantly reduce tax in the long run.

 

If you’re married it’s relatively easy to double the annual CGT exemption by transferring assets to your spouse to sell. HMRC accepts this type of tax-saving arrangement.

 

Example. Instead of them selling all 1,500 Acom shares, Ali gave half to his wife to sell. The effect of the special rules which apply to transfers of assets from one spouse to the other means that when they sell they each make a gain of £3,909 (£7,818/2). Adding this gain to Ali’s others for 2019/20 means that his total gains are £11,909 - just within his annual CGT exemption of £12,000. Assuming his wife hasn’t made other gains exceeding £8,091 in 2019/20, those which she makes from selling the shares in Acom will be covered by her annual CGT exemption.
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