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Kirk Rice Blog

Capital Gains Tax PlanningWritten on May 25, 2016 by Peter Sharratt

Financial Services Questions

The Question:

I use my ISA Allowance each year but not my Capital Gains Tax Allowance, primarily because I do not understand how to make the most of it. Could you explain?

Peter Sharratt answers:

Hopefully the following example will help.  I am going to ignore charges and attitude to risk which in reality are important, but they only serve to complicate the explanation. Everyone has an Annual Capital Gains Tax (CGT) Allowance and this is currently £11,100.

For my example, let’s assume someone (our investor) has £100,000 to invest having already used their ISA Allowance. They invest the £100,000 into a Portfolio of Collective Funds such as Unit Trusts (UT) or Open Ended Investment Companies (OEIC).  Both are often what you will invest in via a Stocks & Shares ISA. But these will NOT be in an ISA and so any gains would be subject to Capital Gains Tax (CGT). A year later the £100,000 may have increased to £110,000 giving our investor an unrealised gain of £10,000 (remember, this is an example, in reality the investment could have fallen). For the gain to become assessable to CGT, it needs to be realised, i.e. the investment needs to be sold. Selling it for £110,000 realises a gain of £10,000 and assuming our investor had no other realised gains it would be Tax Free as it is within their CGT Allowance of £11,100. The £110,000 is immediately reinvested and any gain (for CGT purposes) would then be based on growth over and above the £110,000. If the £110,000 increased to £119,000 (again an example) the following Tax Year it could be sold to realise a gain of £9,000 which again would be Tax Free as it is within the CGT Allowance for that tax year.

At this point our Investor would have another year’s ISA Allowance available and they could  move £15,240 from the Collective Funds into their ISA.  Points to be aware of though; you cannot buy back the same fund/s within 30 days, you have to invest in something different. It therefore makes sense to choose a provider with a broad range of funds to invest in. Having said “ I am going to ignore charges”, you should consider keeping the buying and selling costs to a minimum. It therefore makes sense to choose a provider with low or ideally no dealing charges. Finally, the CGT allowance is a use it or lose it allowance; you cannot carry forward unused allowances cannot carry forward unused allowances from one year to the next.

Any reader interested in discussing this topic further can telephone Peter Sharratt on 01344 875000 or email peter.sharratt@kirkrice.co.uk.

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Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.