Capital gains usually attract less tax than investment or earned income, although they are now taxable as income.
The top rate of capital gains tax (CGT) is 28%, a rate that applies whether you are a higher rate or an additional rate taxpayer. Basic rate taxpayers are liable to an 18% tax rate, to the extent that the gains fall within their remaining basic rate band. CGT was reformed a few years ago, removing some (but not all) of the tax’s complexities and the previous tax bias in favour of long-term
There is an annual exemption of £10,600 of gains, a level which will not increase in 2012/13. This is a particularly generous exemption – worth nearly £3,000 assuming a 28% tax rate – and your tax planning needs to take it into account.
Use it or lose it
Any unused annual exemption cannot be carried forward from one tax year to the next. As the tax year end approaches, you should consider whether any investment gains can be realised free of tax.
The days of selling a holding one day and simply repurchasing on the following day – so called ‘bed and breakfast’ – are long over, but you can achieve similar results by, for example, selling a unit trust holding and then reinvesting in the same fund via an ISA.
Share your gains
Independent taxation means that both you and your spouse or civil partner have an annual CGT exemption, so you can jointly realise £21,200 of gains before starting to pay any CGT.
What is more, transfers between partners are on a no-gains/no loss basis, so gains and losses can be transferred between the two of you without creating any tax liability.
Time your gains
If you want to realise a gain greater than your available annual exemption, you may be able to avoid paying tax by straddling your sales over two tax years. For example, you could sell part of your holding on 5 April 2012, in the 2011/12 tax year, and the balance (after Easter) on 10 April 2012, in the 2012/13 tax year.
Watch your losses
If you sell an investment at a loss during the tax year, that loss is set against any gains you make in the same tax year before your annual exemption is applied. Losses realised in a tax year can only be carried forward to the extent that they are not offset against gains made in the same year.
Whether these rules are beneficial or not depends upon your circumstances, but often in pure tax terms it is best to avoid realising both gains and losses in the same tax year.