The CGT annual exemption – use it or lose it!

Capital gains tax (CGT) is normally paid when an item is either sold or given away. It is usually paid on profits made by selling various types of assets including properties or stocks and shares.

Some assets are exempt from CGT, including assets held in an Individual Savings Account, betting winnings, cash held in sterling, and other personal effects that are individually worth £6,000 or less. For financial assets such as company shares, CGT is due (unless your shares were first granted as options and then purchased as part of an EMI Share Options Scheme).

But did you know that almost everyone is entitled to an annual CGT exemption? This means that no CGT is payable on gains up to a fixed threshold each year, which in 2018/19 is £11,700 and rising to £12,000 in 2019/20.

In order to minimise CGT liability, the most common method is to ensure that the annual exemption is fully utilised each year, as it can’t be carried forwards or backwards. If you don’t use your exemption in a particular tax year, it will be lost. So how can you avoid this? If you’re looking to sell a portfolio of shares or other assets then you should consider the timing of the sale first. This will allow you to distribute the gains between multiple tax years and use up as much of your annual exemption as possible.

Eligible individuals each have their own exemption, so for jointly owned assets, there’s allowance for spouses and civil partners to be exempt from up to £23,400 worth of gains in 2018/19, rising to £24,000 in 2019/20.

Moving gains

Although inter-spouse/civil partner transfers are not technically exempt from CGT, the nature of these transactions means that assets can be passed freely between partners without triggering CGT charges. This treatment requires the spouses/civil partners to be married and living together. It should also be noted that if the spouse or partner later sells an asset that has been transferred, they may have to pay CGT at the same time.

Example

Let’s look at an example to understand how this would work.

Anna sells 500 shares in ABC plc in 2018/19, making a capital gain of £30,000. Being a higher-rate taxpayer, she will have her annual exemption of £11,700 deducted, leaving her with a chargeable gain of £18,300. She’ll pay CGT on this at a rate of 20%, with £3,660 payable the amount gained.

But before the sale, if Anna were to transfer half the shares to her spouse Bob, a basic-rate taxpayer, then the CGT situation would be very different. Both Anna and Bob will be able to use their annual CGT exemptions, and they will each have a chargeable gain of £3,300 (after the annual exemption). Since Bob is a basic-rate taxpayer he’ll pay CGT at 10%, provided his taxable income and chargeable gain fall below the basic rate threshold.

So the capital gains tax on the sale of the shares would be charged as follows: Anna would pay CGT at 20% on the £3,300 chargeable income gained, resulting in a liability of £660. Brian would pay half of this, as his CGT rate is 10%, so £330 – £990 in total.

By transferring half the shares to Brian, Anna potentially saves tax of £2,670.

Whilst it is permissible to organise your financial affairs in such a way as to minimise the tax due, be aware that strict anti-avoidance rules do exist. We always strongly recommend that you seek professional advice before considering transactions like these. It’s worth remembering that under an EMI Scheme, you can be granted options for shares that won’t trigger a CGT liability when they’re sold.