Despite the reduction in Capital Gains Tax (CGT) rates and increase in annual exemption, the amount of CGT paid in 2016/17 was £8.38bn*. Whilst often regarded as one of the most underpaid taxes - HMRCs last official figures showed it was paid by 223k individuals and 19k trusts** - it may surprise you to learn that this was still 60% higher than IHT receipts, a tax which attracts far more column inches and advice.
Over the next 5 years, receipts are expected to increase by 50%*** in anticipation of landlords selling, investors taking stockmarket gains and HMRCs tax clampdown. Yet, it is a tax which has more reliefs and exemptions, than actual chargeable assets, so why do so many people pay it unnecessarily?
This would definitely be at the top of the list, which in turn leads to the lack of clients actively using their annual exemption to 'wash out' capital gains each year. How many clients who have made significant gains in their portfolios during the last 8 years, are potentially sitting on a large CGT bill? Whilst definitely a nice problem to have, it could have been avoided!
Of course, one of the problems is actually identifying the gains made – in particular the realised gains/losses generated as a result of regular fund switching and rebalancing of a model or DFM portfolio – which can often unknowingly wipe out the annual exemption. The problem lies with the amount of information needed, often going back over a period of many years. Whilst it’s readily available via trade confirmation notes (showing book cost and any charges), the consolidated tax certificate (showing reinvested dividends and equalisation payments, amongst other things) and various other reports that may be produced, it is the interpretation of them……
This is often regarded as a dark art performed by tax specialists and accountants named Dumbledore, using magic spells to undertake complex CGT calculations that take into account all of the above, plus the following: fund mergers/corporate actions, the plethora of reliefs and exemptions, section 104 holdings, part disposals, equalisation payments and the matching of units in the same fund bought/sold within 30 days (bed-and-breakfast rules), which can all make your brain hurt!
As a result advisers and their clients often struggle to calculate capital gains within an investment portfolio, often resulting in them not fully using their annual exemption and paying unnecessary CGT – leading to the dreaded self-assessment CGT summary pages!!!
Well, help is at hand, as many platforms provide CGT tools to help support calculations, such as the recently launched Zurich Capital Gains Tool. This tool helps you to calculate (and keep track of) the realised capital gains/losses that your clients have incurred from the disposals of mutual funds within their Investment Account on the Zurich Intermediary Platform. It also shows the current amount of unrealised gains/losses within each fund and using ‘what-if' scenarios, can help you estimate the potential gains that would be realised from a future transaction.
This Capital Gains Planner functionality allows you to calculate the projected:
- sale proceeds required to maximise the remaining annual exemption – ideal for tax year-end planning;
- sale proceeds required in order to generate a specified amount of capital gains – enables you to target a specific amount of annual exemption;
- capital gains that would be generated by placing sale transactions to realise a specified amount of money – this could help indicate whether a partial withdrawal would create a CGT liability for the client.
This creates an ‘advice point’ that makes it easier for you to help clients maximise their annual exemption, minimise CGT and report the correct figures to HMRC - by using typical CGT planning strategies such as:
- avoid CGT altogether and use exempt assets such as ISAs;
- maximise use of annual exemption(s) each year to ‘wash out’ gains;
- use up annual exemption by taking partial withdrawals to supplement income in retirement;
- delay chargeable event to next tax year or split over two tax years;
- use same tax year and carried forward losses, to reduce gains;
- gift assets into a discretionary trust for IHT planning and claim gift holdover relief (gains passed to the trustees);
- invest in EIS/SEIS and claim EIS deferral relief (defers gains made in the past 3 years, for the life of the investment) or SEIS reinvestment relief (reduces matched gains by 50%)
The following table shows the CGT rates payable for different taxpayers and assets:
| Tax status
|| CGT rates
|| Second properties
| Basic rate taxpayer
| Higher & additional rate taxpayers
| Sole traders or Partnership
|| 10% on first £10m of assets qualifying for Entrepreneurs' relief
Andy Woollon is wealth specialist at Zurich UK
* HMRC Tax & NIC receipts - 21/9/2017
** HMRC Capital Gains Tax Statistics for 2014/15 - October 2016
*** www.statista.com - capital-gains-tax-income-forecast-uk 2016/17-2021/22