Reviewing your portfolio? Make sure you cash in on tax exemptions
Last updated 10:32, Tuesday, 27 May 2008
Bob Wheatcroft of Armstrong Watson with some tax tips
The FTSE may be about 10 per cent below the peak it reached last year – but that was more than double the bottom of the last slump five years ago.
Many commentators now think some shares are cheap.
The property market has been widely regarded as a safe haven for investors in recent years but, at least for now, it too seems to have peaked in the wake of the credit crunch.
Many investors will see this as a time to review their portfolios whether of property or of shares.
Disposals of both shares and properties mean that capital gains tax (CGT) should be considered. You pay CGT on the difference between the sale proceeds and the cost.
If your gains are below the annual exemption (£9,600 in this tax year) then you pay no CGT – gains above £9,600 are taxed at 18 per cent.
Property and share gains may well have been built up over a number of years but realising them all at once can mean that this historic rise in values is sometimes well in excess of the annual exemption for the year of sale.
In future there will be no additional CGT reductions for inflation or for holding assets for lengthy periods. The result of inflation alone could mean that you pay CGT even when the true value hasn’t increased.
Well, you can’t use annual exemptions for earlier years unfortunately, but this does rather highlight the cost of wasting this particular tax allowance.
If you could realise £9,600 of gains this year which might be subject to tax next year, then the tax saving is £1,728.
If your husband or wife is doing it too, the saving is doubled. Since this can be done every year, the potential is obvious.
People with sizeable equity shareholdings can do this relatively easily. With property it is more difficult. Nevertheless, there are techniques even with property using trusts which enable the CGT results of doing just that to be reproduced.
If you have to sell now, your options are much more limited. If you are married, you may be able to transfer assets to your husband or wife to use his or her annual exemption.
It is not usually effective to transfer assets to children or to others as this is normally treated the same way as a sale. It is sometimes possible to get round this by using a trust.
If you have flexibility over the investment of the sale proceeds, you could consider putting some of the money into an Enterprise Investment Scheme investment.
This has favourable tax treatment for income tax as well as CGT, allowing you to postpone the capital gain becoming taxable until that investment is itself sold.
In other words you could take advantage of the annual exemption for future years rather than that for past years.
Unfortunately, these investments are often risky and should be chosen with care.
The trick, as ever, is to plan ahead. Don’t wait until you have to sell as that makes dealing with the tax that bit more difficult.
If you are interested in tax planning contact moneymatters@armstrongwatson.co.uk or call freephone 0800 195 2161.
