I have £30,000 investments that aren’t in an Isa, how can I protect them from capital gains tax rising?
I have £30,000 in a mix of shares and funds that I have held for some time that aren’t in an Isa or Sipp.
I am worried capital gains tax and dividend tax rises will eat into my returns but also realise that I can’t get all these investments into an Isa this tax year – and will end up having to pay capital gains tax if I sell them.
How can I work out whether it is worth selling now and getting as much as possible into an Isa – and is there anything else I can do to reduce the tax, such as transfer some of the holdings to my husband?
Tax trap: Investors who have built up large gains outside of an Isa or pension face a capital gains problem when they sell
Lisa Caplan, Director of Charles Stanley Direct Financial Plans, replies: The annual allowance for tax free gains has fallen to £3,000, and the dividend allowance is now a measly £500 a year. This makes sheltering your investments from tax by using your Isa allowance even more important.
The annual Isa allowance is £20,000, so that won’t shelter all the shares and funds right away.
However, you can look at moving the funds over the course of two tax years, or as I outline below, shifting some of the assets to your husband’s name and using his Isa allowance.
There are some complexities in arranging all of this. Moving funds or shares into an Isa (sometimes known as a Bed and Isa) will involve selling them and buying in the Isa, which may trigger capital gains tax – one of the things you are trying to avoid.
You therefore need to plan carefully when to sell each asset to minimise triggering any immediate CGT.
How to cut your CGT bill
Work as partners: Lisa Caplan, of Charles Stanley Financial Plans, says you can pass assets to your spouse to use their CGT allowance too
Firstly, bear in mind that although the allowance has dropped to £3,000, spreading disposals across two tax years means you can use two allowances.
This means you can potentially generate gains of £6,000 before there is CGT to pay if you plan things carefully.
You’ll need to consider each stock and fund and the size of each gain or loss.
It may be that you can sell several assets one tax year and several the next to keep within the annual CGT allowance.
Also bear in mind that you can set losses off against gains. If you have some available losses this can reduce or even eliminate the CGT.
Remember to record everything, and if you do have to pay some CGT you’ll need to either fill in a tax return or use HMRC’s CGT reporting service.
On the slide: The annual capital gains and dividend tax-free allowances have been slashed
Use your husband’s allowance too
Another useful option is transferring some of your holdings to your husband. Transfers between spouses do not count as disposals, so they do not trigger a CGT gain or loss.
Your husband will take on the original cost of the investment (i.e. that you paid) and when he subsequently sells there is his £3,000 allowance to use too.
You could lock in gains of up to £12,000 without paying CGT if you utilise this on top of spreading disposals over two tax years.
You’ll also have your husband’s Isa allowance to use too, so this could be a double win.
If the gains exceed that then consider your respective tax rates. Basic rate taxpayers pay a lower rate of CGT than higher or additional rate. The rates for non-property assets are 10 per cent and 20 per cent on any amount above the basic tax band when added to income. Higher rate and additional rate taxpayers pay the 20 per cent rate on all such gains.
Bear in mind that this is the current situation and watch out for the Budget on the 30th October to see if there is any change to the CGT rates or rules.
Don’t forget about your pension
Finally, don’t forget about pensions as they can act as a further tax shelter. If you do end up with a tax liability you might be able to use the proceeds of your sales to make additional pension contributions that attract income tax relief, as long as you have salary or bonus to cover the payment plus tax relief into the pension.
For basic rate taxpayers this is effectively a 25 per cent uplift to the amount you pay into your pension, and it is over double that for higher rate taxpayers. And there is no CGT or income tax to pay on investments in your pension.
Your funds will be locked away until ten years before your state retirement age (from 55 to 58 depending on your age) under current rules.
When you come to take money out of your pension, the first 25 per cent is tax-free and the rest is taxed as income as things stand.
The value of investments can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable guide to future returns.
Charles Stanley is not a tax adviser. Information contained in this article is based on our understanding of current HMRC legislation. Tax reliefs are those currently applying and the levels and bases of taxation can change. Tax treatment depends on the individual circumstances of each person or entity and may be subject to change in the future. If you are in any doubt, you should seek professional tax advice. Charles Stanley & Co. Limited is authorised and regulated by the Financial Conduct Authority and is part of the Raymond James Financial, Inc. group of companies.