What CGT planning should you be doing now?

The end of the 2011/12 tax year is nearly upon us. If you have investments potentially liable to Capital Gains Tax (CGT) you should be thinking about tax planning. Can giving investments to other members of your family play a part?

Time to plan

The end of the tax year is entirely predictable. For the last couple of hundred years it's been April 5. Yet every year thousands of taxpayers miss the chance to save CGT by not undertaking some simple tax planning. The group which typically misses out are those who own shares, unit trusts etc. If that includes you, we've rounded up a few end of year planning ideas to inspire you.

Use your own exemption first

Your main weapon against the Taxman is the annual CGT exemption. If you don't use it every year, you might be throwing money away.

Example. Jane bought shares in ABC Plc 15 years ago at a cost of £10,000 and sold them today for £30,600 making a gain of £20,600. Assuming she hasn't used her annual exemption of £10,600 for 2011/12, this is deducted from the ABC gain. This leaves £10,000 taxable at up to 28% resulting in a £2,800 tax bill. But she could have completely avoided this. If Jane had sold enough of her ABC shares in one or more earlier years to use her annual exemption she would have reduced the gain on the final sale. This would be the case even where she repurchased the same number of ABC shares a little while after each sale (see The next step).

Shifting gains to your spouse

Shifting shares to your spouse can double the CGT annual exemption you can use in any year. So, for example, if you intend to sell shares that will result in a gain greater than your exemption, giving some of these to your partner can reduce your CGT bill. Gifts of assets to your spouse are treated as if you had sold them at the same price you paid for them. This means for CGT purposes you don't make either a gain or a loss on the transfer. Instead, the gain or loss is shifted to your spouse so when they sell the shares etc. they can use their annual exemption against this.

Shifting assets to your kids

Giving shares etc. to your kids counts as a sale at market value. Therefore, unlike gifts to your spouse, the number of annual exemptions available isn't increased, at least in the short term, but in the long term it's a different picture. Everyone, including children under the age of 18, has a CGT annual exemption. Therefore, transferring shares and selling them when they have increased in value means you can use your child's CGT exemption against this gain.

Trap. Your youngsters will be entitled to do what they want with the shares etc. when they reach 18; this might not meet with your approval.

Shifting assets to yourself

Tip. If you don't have family or just don't fancy giving your shares away, you can make use of your annual CGT exemption by transferring investments into your own pension fund or an ISA. We've previously explained how this allows you to shelter your investments from future CGT (yr.11, iss.16, pg.3, see The next step).

When you transfer shares etc. to your spouse, any capital gain on these is also transferred. This means when they sell they can use their CGT annual exemption against this. Giving shares etc. to your children can trigger CGT, but because children have their own CGT exemption, this can be used to shelter future gains.

If you need any more information on capital gains tax or on any other tax issues, please get in touch with us on 0191 386 4786 or by emailing information@westwaters.com

What CGT planning should you be doing now?

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