Tax planning: Capital Gains Tax

Although relatively little money is raised by Capital Gains Tax (CGT), the tax is very important for several reasons.  It helps to police the activities of people who try to ‘dress up’ profits of an income nature as capital.  It also acts, indirectly, as a wealth tax.

One simple and effective way to reduce exposure to CGT is to hold investments through an ISA.  Thus if an investor holds a portfolio of shares outside an ISA that are standing at a gain, good housekeeping suggests taking gains each year equal to the annual exemption (currently £12,300 and likely to remain at that level until the end of 2025/26) and moving the proceeds, up to the annual subscription limit, into the ISA.  Transaction costs may be saved by ‘bed and ISA’ sale and repurchase of shares that have done well and are to be kept long-term.  Over time, all of the assets that would otherwise be taxed can reach the safe haven of the ISA.

What is not always appreciated is that CGT may apply to a transaction even where no money changes hands, for example the gift of an asset that has risen in value during the ownership of the donor.  Unless an exemption or relief applies, the transaction is treated as taking place at market value.

One example of an exception to this rule is a gift to a UK-based family discretionary trust.  The gain that would otherwise trigger a CGT charge can usually be ‘held over’ so that the trustees are treated as acquiring the asset at the donor’s book value.  The donor’s gain is in effect taxed later, when the trustees dispose of the asset.

Interestingly, where the trustees pass the asset on to a beneficiary, they may be able again to hold over the gain, postponing any CGT charge.  Thus a gain may escape taxation for a long time.  There are ‘wrinkles’ to this situation to be careful about, so get advice before entering into transactions, but this procedure can even help where an offshore trust full of gains is repatriated to the UK.

All this has become more urgent since the publication in June 2019 by the Office of Tax Simplification of their second report on Inheritance Tax (which also mentions CGT).  For a review of that Report, go to my article ‘So: what about CGT: has there been a reprieve?‘.