CGT and personal allowances

[typonaut]

I’d always thought that one could not combine a CGT allowance with a personal allowance, ie if you had no other income you could not inflate your effective CGT allowance to £15,570 (CGT allowance of £3,000 + personal allowance of £12,570).

But then I found this page: https://www.gov.uk/capital-gains-tax/rates

The first problem with it is that it refers to higher rate tax payers, and basic rate tax payers. Well, if you have no income, then you won't fall into the "basic rate" band, so, you're not really a basic rate income tax payer (https://www.gov.uk/income-tax-rates).

But let's say I have misunderstood that point, and that one is a basic rate taxpayer if your income is below the higher rate threshold. I then follow the steps laid out:

1. Work out how much taxable income you have - this is your income minus your Personal Allowance and any other Income Tax reliefs you’re entitled to.

Easy enough: £0 - £12,570 = -£12,570

2. Work out your total taxable gains

Well, to make it easy, let's say I have total gains of £13,000.

3. Deduct your tax-free allowance from your total taxable gains.

£13,000 - £3,000 = £10,000

4. Add this amount to your taxable income.

Hmm, here's where it gets a little tricky

-£12,570 + £10,000 = -£2,570 (or, if you like £10,000 + -£12,570 = -£2,570)

5. If this amount is within the basic rate Income Tax band, you’ll pay 18% on your gains made from 30 October 2024. For gains made between 6 April 2024 to 29 October 2024, you’ll pay 10% on your gains (or 18% on residential property and carried interest).

Err, couple of problems here:

The crux of the problem for me is that, from following the instructions, I have no CGT to pay on gains of £13,000, because the figure this sequence comes to is -£2,570 - ie less than zero.

The further issue is that, following the instructions at 5., even if I’d made a gross gain of £25,000, I’d still have no CGT to pay:

£25,000 - £3,000 = £22,000

£22,000 - £12,570 = £9,430

£9,430 is below the "basic rate incom tax band", so… there's no GCT to pay!?

Seems to me that somehow you end up getting the personal allowance twice, using these instructions.

The other thing that confuses me, is that, for the sake of income tax, interest and dividends seem to be considered as "income", with additional allowances. That is to say that you can combine your personal allowance and starting rate for savings to get up to £17,570 with no income tax to pay. See https://www.gov.uk/apply-tax-free-interest-on-savings

Similarly you can combine your personal allowance and dividend allowance for a total of £13,070, with no income tax or dividend tax to pay. See https://www.gov.uk/tax-on-dividends

If, regardless of these instructions, you really only get a CGT allowance of £3,000, and completely disregard the personal allowance, then that seems more than a little inequitable compared to the position of those receiving interest or dividends.

[Itsallaguess]

1. Work out how much taxable income you have - this is your income minus your Personal Allowance and any other Income Tax reliefs you’re entitled to.

Easy enough: £0 - £12,570 = -£12,570

If you've no income that's taxable, then wouldn't the answer to that question simply be £0?

Cheers,

Itsallaguess

[Gersemi]

The personal allowance cannot be set against Capital Gains, although they do reduce taxable income to calculate the rate at which Capital Gains are charged.

https://community.hmrc.gov.uk/customerf ... 155d9771aa

confirms that Personal Allowances cannot be set against Captial Gains.

[DrFfybes]

I’d always thought that one could not combine a CGT allowance with a personal allowance, ie if you had no other income you could not inflate your effective CGT allowance to £15,570 (CGT allowance of £3,000 + personal allowance of £12,570).

But then I found this page: https://www.gov.uk/capital-gains-tax/rates

It has been covered recently in other threads but scattered around, eg this thread from this post onwards..

https://lemonfool.co.uk/viewtopic.php?p=716691#p716691


But Personal allowance is for Income only (earned income, pension payments, Dividend Income or Interest above the allowances) - it cannot be used against gains.

So if your Income is at or below the Personal Allowance, you have first £3k of gain tax free, then £37700 at the basic rate applicable when you realised the gain. So if this was prior to the budget last year it will be taxed at 10%, sales since taxed at 18%.

I also learnt that is you contribute to a SIPP then this amount moves your Higher rate tax threshold up, which can increase the amount of gain taxed at the lower rate. This can be exceptionally beneficial if your income + gains borders the £53270 cutoff as you get tax relief on the money going into the SIPP AND save higher rate tax on gains that exceed the threshold.

Paul

[pochisoldi]

I’d always thought that one could not combine a CGT allowance with a personal allowance, ie if you had no other income you could not inflate your effective CGT allowance to £15,570 (CGT allowance of £3,000 + personal allowance of £12,570).

But then I found this page: https://www.gov.uk/capital-gains-tax/rates

It has been covered recently in other threads but scattered around, eg this thread from this post onwards..

https://lemonfool.co.uk/viewtopic.php?p=716691#p716691


But Personal allowance is for Income only (earned income, pension payments, Dividend Income or Interest above the allowances) - it cannot be used against gains.

So if your Income is at or below the Personal Allowance, you have first £3k of gain tax free, then £37700 at the basic rate applicable when you realised the gain. So if this was prior to the budget last year it will be taxed at 10%, sales since taxed at 18%.

I also learnt that is you contribute to a SIPP then this amount moves your Higher rate tax threshold up, which can increase the amount of gain taxed at the lower rate. This can be exceptionally beneficial if your income + gains borders the £53270 cutoff as you get tax relief on the money going into the SIPP AND save higher rate tax on gains that exceed the threshold.

Paul

Pension contributions out of taxed earnings (not just SIPP contributions) and gift aid contributions all increase the basic rate band, and reduce the amount of capital gains liable to the higher rate.

If you are a basic rate tax payer, and have capital gains which would take you into the 28% higher rate band, you can still cut your CGT bill down by making (gross) pension contributions amounting to the lower of (a) £3600, (b) the amount of capital gain liable to 28% CGT (c) your gross taxable earnings for the year or (d) your limit for pension contributions for the year (usually £60k, could be £10k if you are subject to MPAA).

[typonaut]

Rather than comment on each reply, I'll just make a couple of obserrvations.

I am perfectly happy to accept that the other contributors to this thread are correct. However, that means that I have completely misinterpreted the page I referenced (https://www.gov.uk/capital-gains-tax/rates), or that page must be wrong. If it is the former (ie, I have misinterpreted it), please work through the steps to show how I have made that mistake. If it is the latter, then please point me to another .gov/HMRC document that directly contradicts the reference I have given.

I had seen the HMRC comments board before posting, because I tried to research the point. However, it is worth considering that this may not be definitive in itself because:

a: HMRC staff do make mistakes ;(
b: There was a significant change to this regime in October, and the relevant comments pre-date that change.

Thanks

[XFool]

Rather than comment on each reply, I'll just make a couple of obserrvations.

I am perfectly happy to accept that the other contributors to this thread are correct. However, that means that I have completely misinterpreted the page I referenced (https://www.gov.uk/capital-gains-tax/rates), or that page must be wrong. If it is the former (ie, I have misinterpreted it), please work through the steps to show how I have made that mistake. If it is the latter, then please point me to another .gov/HMRC document that directly contradicts the reference I have given.

No expert on tax matters, but it seems to me your mistake is simply that you have invented a non existent quantity: Negative income.
Whereas there is no such thing. There is taxable income or there is zero taxable income. HMRC does not, AFAIK, recognise negative taxable income.

[londoninvestor]

No expert on tax matters, but it seems to me your mistake is simply that you have invented a non existent quantity: Negative income.
Whereas there is no such thing. There is taxable income or there is zero taxable income. HMRC does not, AFAIK, recognise negative taxable income.

That's right, but to be fair, @typonaut is right that a literal reading of that HMRC page does imply that "taxable income" can be negative. This page could do with some editing and clarification.

It would be better to mirror the tax legislation more closely, and instead of saying "X minus Y", say something like "whatever is left of X after deducting Y". (That's similar language to the legally prescribed method of calculating income tax). Or say "zero if Y > X, otherwise X-Y".

It would also be better for HMRC to find a term other than "taxable income" for what they mean here. I don't think that phrase has an official legal definition, but in other contexts (such as this table here), HMRC use it to mean what the law calls "income chargeable to tax", i.e. the amount before deducting the personal allowance. That's not the same meaning that they're using on this CGT page!

The HMRC calculator linked from here does do the calculation correctly, although with some limitations (e.g. it doesn't let you input pension contributions or Gift Aid to see their effects).

[londoninvestor]

Well, if you have no income, then you won't fall into the "basic rate" band, so, you're not really a basic rate income tax payer (https://www.gov.uk/income-tax-rates).

Also a good point. If they added a separate section for "if you don't pay income tax", the position would be clearer and the "X minus Y" language wouldn't be so problematic because it would only refer to cases where X > Y (i.e. the person pays income tax).

They should still avoid using "taxable income" to mean different things on different pages!

[Gersemi]

I am perfectly happy to accept that the other contributors to this thread are correct. However, that means that I have completely misinterpreted the page I referenced (https://www.gov.uk/capital-gains-tax/rates), or that page must be wrong. If it is the former (ie, I have misinterpreted it), please work through the steps to show how I have made that mistake. If it is the latter, then please point me to another .gov/HMRC document that directly contradicts the reference I have given.

Thanks

I think the salient point is that the page you have linked to is about calculating the rate that is used to calculate CGT, not the amount chargeable. But I agree with londoninvestor, they should include a separate point for those with no taxable income.

[typonaut]

I think the salient point is that the page you have linked to is about calculating the rate that is used to calculate CGT, not the amount chargeable. But I agree with londoninvestor, they should include a separate point for those with no taxable income.

I'm not sure that is the salient point, because it's really about how to calculate what you might owe, and allownces.

However, I think we agree, that what this page says is wrong, or at least confusing. Even if we disregard the first step:

1. Work out how much taxable income you have - this is your income minus your Personal Allowance and any other Income Tax reliefs you’re entitled to.

So, we'll agree that £0 minus £12,570 = £0

2. Work out your total taxable gains.

I suppose it really means "Work out your total gains (less costs)", because it’s not taxable until you’ve deducted any allowances:

£13,000

3. Deduct your tax-free allowance from your total taxable gains.

£13,000 - £3,000 = £10,000

4. Add this amount to your taxable income.

£10,000 + £0 = £10,000

5. If this amount is within the basic rate Income Tax band, you’ll pay 18% on your gains made from 30 October 2024. For gains made between 6 April 2024 to 29 October 2024, you’ll pay 10% on your gains (or 18% on residential property and carried interest).

Errrrr… the basic rate income tax band is £12,571–£50,270 (https://www.gov.uk/income-tax-rates), and £10,000 is obviously less than £12,571!?

Do you suppose that they actually mean "If the amount is less that £50,271, you’ll pay…"?

[londoninvestor]

Do you suppose that they actually mean "If the amount is less that £50,271, you’ll pay…"?

They mean "if the amount is less than the width of your basic rate band" - i.e. £37,700 as a starting point, but potentially increased if you've made pension contributions or Gift Aid donations.

(As @DrFfybes said in his post above.)

[typonaut]

Do you suppose that they actually mean "If the amount is less that £50,271, you’ll pay…"?

They mean "if the amount is less than the width of your basic rate band" - i.e. £37,700 as a starting point, but potentially increased if you've made pension contributions or Gift Aid donations.

(As @DrFfybes said in his post above.)

I suppose that is correct, if your income first exceeds £12,570. But if your income is less than that, then you don't enter the basic tax rate band.

That is to say that if I have no income, and somehow I manage to make £45,000 capital gains, I don’t fall into the higher rate for CGT on £4,300 (£45,000 - £3,000 - £37,700), do I?

[typonaut]

Do you suppose that they actually mean "If the amount is less than £50,271, you’ll pay…"?

Sorry, that was supposed to read as above.

[londoninvestor]

That is to say that if I have no income, and somehow I manage to make £45,000 capital gains, I don’t fall into the higher rate for CGT on £4,300 (£45,000 - £3,000 - £37,700), do I?

Yes, unfortunately you do.

The best way to think of this is that the £37,700-wide basic rate band is shared between Income Tax and CGT.

The first thing that is allocated to that band is income in excess of the £12,570 Personal Allowance.

Then, if there is anything remaining of that band, it is used for gains in excess of the £3,000 Annual Exempt Amount.

Any further gains (so anything about £40,700 for someone whose income doesn't exceed the PA, and who hasn't widened the basic rate band through pension contributions or Gift Aid) are taxable at the higher rate of CGT.

I understand why people get confused by this, because you often read the half-truth that "the point where the higher rate of CGT becomes payable is the point when combined income+gains exceeds £50,270". That's true when your income exceeds the PA, but not true when it doesn't.

[londoninvestor]

so anything about £40,700 for someone whose income doesn't exceed the PA

Sorry, that should have said "above", not "about"!

[typonaut]

The first thing that is allocated to that band is income in excess of the £12,570 Personal Allowance.

Then, if there is anything remaining of that band, it is used for gains in excess of the £3,000 Annual Exempt Amount.

Ok, I think what you are saying is that the personal allowance (£12,570) is only an allowance for income (wages/interest/dividends), but not for capital gains, or as an allowance for calculating the rate of CGT (ie, if you just have capital gains, you may as well consider that you’ve had a notional £12,570 in income – that you haven't really had – for the purposes of calculating any CGT)?

However, I don't think I am quite getting the last bit there, about partial use of the personal allowance. Say if one had £10,000 in income, that would leave £2,570 – are you saying that yu can use that to reduce CGT? That seems not to be inline with what you are writing - but perhap I am misunderstanding what you mean by "gains".

[typonaut]

However, I don't think I am quite getting the last bit there, about partial use of the personal allowance. Say if one had £10,000 in income, that would leave £2,570 – are you saying that yu can use that to reduce CGT? That seems not to be inline with what you are writing - but perhap I am misunderstanding what you mean by "gains".

Sorry, got it now - typing too quickly for my brain to keep up!

[londoninvestor]

(ie, if you just have capital gains, you may as well consider that you’ve had a notional £12,570 in income – that you haven't really had – for the purposes of calculating any CGT)?

Sure, you can think of it that way if you like. What really clarified it in my mind though was a different thinking shift: the realisation that the Personal Allowance is not a tax band!

No blame on anyone for thinking of it that way of course, particularly since HMRC themselves refer to it that way on the page you cited earlier.*

However, that approach doesn't reflect the way the legally prescribed income tax calculation works, where it's clear that first the PA is applied ("Step 3" in the language of the Income Tax Act 2007), and only subsequently is the remaining income assigned to bands ("Step 4").

The bands are expressed in terms of the income after deducting the PA, for example in Section 10 of the act:

(2) Income tax on an individual's income up to the basic rate limit is charged at the basic rate ...
(5) The basic rate limit is £37,700.

So the law doesn't say the basic rate band is £12,571 to £50,270 in terms of total income; it says the basic rate band is £0 to £37,700 in terms of post-Personal Allowance income.

Is this just pedantry? Well, for the average taxpayer with a job or pension, and with their savings and investments largely in tax wrappers, the distinction doesn't matter a lot. But there are some situations that become much easier to understand by making the conceptual distinction between the Personal Allowance and the income tax bands.

1) The CGT calculations that we're talking about here. For example understanding why someone with no income and £45k of gains can't fit all those gains into the lower rate of CGT. In a picture where the PA is the first, zero band of income tax, it seems counterintuitive: "ok, the second (but only the second) band of income tax has some significance for CGT, so we have to imagine a notional income that pushes a taxpayer from the first zero band into the second band". For me at least, it became much more intuitive by clearly distinguishing allowances from bands: the first band applies to the first £37,700 of {income (after applying PA) plus gains (after applying £3k Annual Exempt Amount)}.

2) Income fills up the bands in a strict order: employment and pension income has the first claim to the lower bands, then savings income, then dividends. [Ignoring some miscellaneous types for now]. But the same rules are not imposed on the allocation of the Personal Allowance. The taxpayer can use it to eliminate any £12,570 of their income, whatever is most favourable to their tax position - and there are various circumstances where it's better not to allocate it all to employment/pension income. Again, this seems puzzling if the Personal Allowance is a 0% band; a bit less so in the light of the PA being a different concept than the tax bands.


* and also, because chancellors of the last few years have created so-called "allowances" which aren't. The Trading Allowance is more or less an allowance. The "Personal Savings Allowance" and "Dividend Allowance" definitely aren't: they're rules which apply a 0% rate to some income that has been allocated to tax bands.

[XFool]

...No wonder I can't stand the very thought of CGT!