Earlier this year, the Chancellor took the first step towards potential wide-ranging tax reform by commissioning a review of Capital Gains Tax (CGT). Rishi Sunak has asked the Office of Tax Simplification (OTS) to consider the overall scope of CGT, including the rates which apply, and the allowances and exemptions.
Without pre-empting the outcome of the review, it’s possible that CGT rates could rise or that some of the valuable exemptions or allowances could be scrapped. So, it could pay to make the most of the current CGT reliefs ahead of any change in the Autumn budget.
Making the most of the CGT allowances typically means crystallising gains. But has Covid-19 actually provided an opportunity to crystallise losses? While no one finds it fun to see the value of their portfolio fall, offsetting these losses against future gains could make the pain easier to bear once the markets begin to recover.
Offsetting capital losses against capital gains
You’re probably familiar with the idea that capital losses incurred in a tax year must be offset against any capital gains in the same tax year.
If the losses are more than the gains, you can carry this loss forward indefinitely and set it off against gains you make in future years. And, if you carry forward losses, you benefit from deciding how much of this loss you want to use in subsequent years.
Here’s an example.
If you sold two investments in the same tax year, with one making a capital gain of £20,000 and the other a loss of £20,000, they would cancel each other out.
If, however, you made a loss of £20,000 in a previous tax year and a gain of £20,000 in the next tax year, you only need to offset £7,700 of the ‘carried forward’ loss to bring the net capital gain down to within the £12,300 annual CGT exemption.
If your gain is below £12,300 in the 2020/21 tax year, you’ll pay no CGT. You can then offset the remaining loss of £12,300 against gains made in future tax years.
Sell and rebuy investments – but beware of the ‘matching’ rules
What do you do if you want to keep hold of the investment that you own, rather than crystallise any losses?
One way is to sell and rebuy these shares. However, the CGT matching rules mean that, where the purchase of the same share or collective is made within 30 days of a sale, the transactions are linked together when it comes to calculating your CGT liability.
If you bought shares in AstraZeneca five years ago for £10,000 and sold them in the current tax year for £5,000, a loss of £5,000 has been generated. Under the matching rules, if you then bought these shares within 30 days of the sale for, say, £5,200, it is this cost that is matched to the sale. You’ll have created a loss of just £200 as the £10,000 original base cost remains.
For this strategy to be effective, you have to wait for more than 30 days before you buy back the shares – and of course, there is a risk the price may have risen during that time.
How ‘bed and ISA’ works
If you don’t want to be out of the market for 30 days, you could consider:
- Immediately rebuying the investment through your pension
- Having your spouse or civil partner rebuy the investment. However, be aware that the spouse/civil partner who rebought the investment should wait for at least 30 days before they consider transferring it back to your name. If they don’t, HMRC could deem that there is an ‘arrangement’ in place and any low generated will not be allowable
- Immediately rebuying the investment through an ISA. This so-called ‘bed and ISA’ strategy means you would sell shares or investment funds held outside an ISA and then rebuy them within an ISA wrapper, meaning your holdings will then be immune from CGT.
Remember to report your losses
The final point to note is that you must notify HMRC of capital losses for them to be allowable. Ordinarily, you will do this through your tax return although you can also notify them separately in writing.
You must claim the losses within four years od the end of the tax year in which you made the loss. There is currently no time limit for using any such losses.
If you have any capital gains issues that you need advice on, we can help. Please send us a message via the HFMC Wealth website or call us on 020 7400 4700.