Reducing the capital gains tax liability in an investment portfolio

By August 6, 2021Tax Planning
investment portfolio

You don’t know what you’ve got till it’s gone, and investors would be wise to make use of their annual capital gains tax allowances while they’re still available.

Making a good return on investments is one of the reasons why people come to us for help with their finances. But while choosing the right investments is an essential part of the process, it is just as important to make use of any tax allowances that are available. One particular allowance worth taking advantage of is the capital gains tax annual allowance.


What is capital gains tax?

Capital gains tax (CGT) is the tax that can be charged on the profit or gain made when selling, gifting, transferring, exchanging or disposing of an asset. CGT doesn’t apply in all cases, such as selling your home or any personal belongings worth less than £6,000, which are not subject to CGT. However, ‘chargeable assets’ – which includes shares, investment funds, and second properties – that generate a capital gain when they are sold will generally be liable for CGT.


What’s the CGT annual allowance?

When selling investments, basic rate taxpayers will be required to pay CGT at a rate of 10% on gains made on chargeable assets, and higher and additional rate taxpayers can expect to pay 20%. But the good news is that everyone has their own personal CGT allowance available every tax year (6 April to 5 April), which can be used to reduce or eliminate a CGT liability. For the current tax year, the CGT annual allowance is £12,300. This means you can make a profit or capital gain on chargeable assets up to that amount before any CGT is due, and you will then pay CGT at your tax rate on the remaining gain over that amount. Of course, if you have made several gains over the course of the tax year, the CGT liability will be calculated based on the total gain made in the year, with any losses crystallised offsetting the gains made.


How can people end up with a surprise CGT bill?

Although current CGT rates are historically low (CGT was as high as 40% in recent years) and most individuals will never pay it, it does catch investors out from time to time. In our role as financial advisers, we are often asked by new clients to review their existing investment portfolio arrangements.

Where investments have been held for many years, we often discover portfolios laden with investments that carry significant capital gains, that have accrued over a long period of time. Often investors haven’t made use of the CGT annual allowance in past years, and with CGT, it is a case of using the allowance each year or losing it, as unused allowances cannot be carried forward to be used in future years.

So, one of the first things we do is to make sure that the client’s investments are being managed wisely, and with due consideration to the tax implications that come with it. Careful management at key times in the tax year mean we can limit the gains payable on an investment portfolio, ensuring that gains are realised each year to use up the CGT allowance. In most cases, carrying out this practice of limiting the gains payable on an investment portfolio can have a significant positive long-term impact on the total return on the investment.

Will CGT rules be changing soon?

Towards the end of last year, Chancellor Rishi Sunak commissioned the Office of Tax Simplification to look at simplifying the CGT rules, and also asked it to consider specific areas where the existing rules distort people’s behaviour. In response, the Office of Tax Simplification published a report that recommended the annual CGT exemption should be reduced from the current level of £12,300 to between £2,000 and £4,000. Their report also suggested realigning CGT rates to income tax, which would take them from 10% and 20% on investments (for basic and higher rate taxpayers) to 20% and 40% respectively.

Should these proposals be adopted, this would mean lots of people would suddenly face considerable CGT bills. For example, under the new proposals, a higher rate taxpayer who made a capital gain of £12,300 (which is currently exempt from CGT) would find themselves stuck with a CGT bill of somewhere between £3,320 and £4,120. That’s clearly a significant tax hike for anyone to pay.

At present, there’s no indication that the recommendations published by the Office of Tax Simplification will be implemented. But given the unprecedented levels of government support offered during the pandemic, there is a good chance that changes to CGT will arrive in some form. For now though, it’s a good idea to take a look at your investment portfolio and make sure that your annual CGT exemption is being used to the fullest extent.


If you are interested in having a conversation about your investment portfolio with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice.