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CGT Please Help Me To Understand

Practical Issues
DaveP
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CGT Please Help Me To Understand

#419109

Postby DaveP » June 12th, 2021, 8:52 pm

A hypothetical(ish) scenario:

I have a lump sum to invest. I am happy with my investment choices but have cash way above the ISA threshold.

I therefore intend to invest the maximum possible into an ISA (for self and spouse) and the rest into the same portfolio but outside of an ISA.

I then intend to “Bed and ISA” the maximum possible each year.

Now I understand that CGT is payable, above the threshold, on capital gains.

Question 1: What if I don't make a capital gain in the relevant year? (ie what if my portfolio makes a loss, or stays the same, at the year end - can I “Bed & ISA” the maximum ISA allowance without CGT applying?).

Question 2: Over what period does CGT apply? (eg let's say that I start with £1m in year one and that my portfolio is worth the same at the year end – can I just sell as much as I like without CGT applying?).

Question 3: Can I sell a proportion of my portfolio such that any capital gain on that proportion would be below the annual allowance or does the CGT apply to the whole portfolio?

For the sake of simplicity, please assume that I invest everything into a single fund.

My brain probably already holds the answers but I'd really appreciate some clarification. (And sorry for the rookie questions!).

pje16
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Re: CGT Please Help Me To Understand

#419114

Postby pje16 » June 12th, 2021, 9:17 pm

I am not a tax expert but as I understand it
1) The point from where CGT is based is the cost price, if you buy at £100 and hold for a year and it stays the same there is no point in B&B as you will sell at 100 and buy back at £100 and be at the same cost postion (you would in fact be worse off because you lose on the price spread of buying and selling (sell at say £99 and buy back at £101)

2) CGT is annual, you cannot carry losses forwards For the 2020 to 2021 tax year the allowance is £12300 below that you pay no CGT
Also CGT does not apply to an ISA

3) CGT only applies to sales over 12300 (outside of an ISA) and has nothing to do with the value of your portfolio

hope this helps

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Re: CGT Please Help Me To Understand

#419120

Postby Maylix » June 12th, 2021, 9:47 pm

DaveP wrote:A hypothetical(ish) scenario:

I have a lump sum to invest. I am happy with my investment choices but have cash way above the ISA threshold.

I therefore intend to invest the maximum possible into an ISA (for self and spouse) and the rest into the same portfolio but outside of an ISA.

I then intend to “Bed and ISA” the maximum possible each year.

Now I understand that CGT is payable, above the threshold, on capital gains.

Question 1: What if I don't make a capital gain in the relevant year? (ie what if my portfolio makes a loss, or stays the same, at the year end - can I “Bed & ISA” the maximum ISA allowance without CGT applying?).

Assuming you only have one share/fund in your portfolio and you don't make a gain when you sell, there wont be any CGT so, Yes, you can.


Question 2: Over what period does CGT apply? (eg let's say that I start with £1m in year one and that my portfolio is worth the same at the year end – can I just sell as much as I like without CGT applying?).
CGT applies when you sell your shares. You might have held them for 1 month or 3 years, it still applies the same. The CGT free allowance though is annual.
Assuming that you only have one share/fund in your portfolio, then if the portfolio value is the same at year end as at start of year that implies that the share/fund price is the same at those two points so if you sell at year end there wont be any gain, so no CGT, no matter how much you sell. You are still limited by the ISA limits on how much you can Bed & ISA in any one year though


Question 3: Can I sell a proportion of my portfolio such that any capital gain on that proportion would be below the annual allowance or does the CGT apply to the whole portfolio?

CGT applies to the shares you sell.. If your portfolio is worth £10m or £10K, doesn't matter. Only the shares you sell matter.
So, again assuming your portfolio is all invested in 1 share/fund, Yes you can sell a proportion such that the CGT is below the annual allowance. You're still limited by the ISA allowance though, if you want to Bed & ISA.

For the sake of simplicity, please assume that I invest everything into a single fund.

My brain probably already holds the answers but I'd really appreciate some clarification. (And sorry for the rookie questions!).


2 general points, CGT doesn't care bout your portfolio size, or about potential gains/losses, only cares about the shares you actually sell (i.e. when the gain or loss that was sitting in your portfolio is actually realised). Also, if you're portfolio contains 2 shares, one that has gained a lot and one that has lost a lot, your portfolio might be the same value at year end as it was at the start of the year, but depending on which of the 2 shares you sell or in what proportion, your CGT could be vastly different.
Hope that helps. Feel free to come back and ask if anything's not clear.
May Lix

mc2fool
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Re: CGT Please Help Me To Understand

#419127

Postby mc2fool » June 12th, 2021, 10:06 pm

pje16 wrote:I am not a tax expert but as I understand it
1) The point from where CGT is based is the cost price, if you buy at £100 and hold for a year and it stays the same there is no point in B&B as you will sell at 100 and buy back at £100

The OP is talking about bed'n'ISAing, not bed'n'breakfasting.

pje16 wrote:2) CGT is annual, you cannot carry losses forwards

Yes you can. You can declare and carry forward overall losses in a year indefinitely. E.g. if you make two sales in the same year, one at profit of say £1000 and another at a loss of £500 then overall you've made a gain of £500 and that's it. But if the second was at a loss of £1500 then you have an overall loss for the year of £500 and you can carry that forward to use against gains above the allowance in a future year. https://www.gov.uk/capital-gains-tax/losses

pje16 wrote:3) CGT only applies to sales over 12300 (outside of an ISA) and has nothing to do with the value of your portfolio

CGT applies to gains above £12,300, not sales. But you do also have to declare sales above 4 * £12,300 = £49,200 even if there is no CGT to be paid.

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Re: CGT Please Help Me To Understand

#419133

Postby mc2fool » June 12th, 2021, 10:36 pm

Maylix wrote:
DaveP wrote:Question 2: Over what period does CGT apply? (eg let's say that I start with £1m in year one and that my portfolio is worth the same at the year end – can I just sell as much as I like without CGT applying?).
CGT applies when you sell your shares. You might have held them for 1 month or 3 years, it still applies the same. The CGT free allowance though is annual.
Assuming that you only have one share/fund in your portfolio, then if the portfolio value is the same at year end as at start of year that implies that the share/fund price is the same at those two points so if you sell at year end there wont be any gain, so no CGT, no matter how much you sell.

No, the value at the start of the year is irrelevant, what matters is the cost when you bought them. Selling at year end at the same price as the share/fund was at year start will still incur a capital gain (or loss) if the sale nets more (or less) than the cost when bought; interim prices are irrelevant.

Kantwebefriends
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Re: CGT Please Help Me To Understand

#419156

Postby Kantwebefriends » June 13th, 2021, 1:48 am

A capital gain, or capital loss, occurs only when an asset is sold i.e. when a gain or loss is realised. Don't confuse a change in book value with a capital gain.

Therefore the size of your portfolio is irrelevant (unless you decide to sell all of it).

But if you wish to pursue a career in journalism, ignore this advice. Then you'll be able to complain that plutocrats don't pay tax on their capital gains - indeed, if you really want a headline you should complain that they don't pay income tax on their capital gains.

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Re: CGT Please Help Me To Understand

#419210

Postby Maylix » June 13th, 2021, 11:27 am

mc2fool wrote:
Maylix wrote:
DaveP wrote:Question 2: Over what period does CGT apply? (eg let's say that I start with £1m in year one and that my portfolio is worth the same at the year end – can I just sell as much as I like without CGT applying?).
CGT applies when you sell your shares. You might have held them for 1 month or 3 years, it still applies the same. The CGT free allowance though is annual.
Assuming that you only have one share/fund in your portfolio, then if the portfolio value is the same at year end as at start of year that implies that the share/fund price is the same at those two points so if you sell at year end there wont be any gain, so no CGT, no matter how much you sell.

No, the value at the start of the year is irrelevant, what matters is the cost when you bought them. Selling at year end at the same price as the share/fund was at year start will still incur a capital gain (or loss) if the sale nets more (or less) than the cost when bought; interim prices are irrelevant.


Thanks, Macfool2, Yep, totally agree. Sorry to the OP if that was not clear in my original reply.
May Lix

Midsmartin
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Re: CGT Please Help Me To Understand

#419238

Postby Midsmartin » June 13th, 2021, 12:27 pm

I think the above is clear. Here's an example.
You purchase 1000 shares for £10 each in both company A and B in May in year 1.
By Christmas, company A has flopped. You sell your 1000 shares for only £1 each.Oops. You do nothing else with your investments, and declare a capital loss to the tax people of £9000 for that tax year to carry forward.

In year 2, company B booms.
You sell 500 of your shares in it for £60 each. A profit of 500*50=25000. You keep the rest of your company B shares.
In your tax return you note your gain of 25000. You deduct the 9000 loss from the previous year that you'd notified them about at the time. You deduct your annual cgt allowance (is it £12000??) To leave a taxable amount of £4000 on which you pay cgt at the appropriate rate dependent on the amount of your other income

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Re: CGT Please Help Me To Understand

#419250

Postby mc2fool » June 13th, 2021, 1:16 pm

Midsmartin wrote:I think the above is clear. Here's an example.
You purchase 1000 shares for £10 each in both company A and B in May in year 1.
By Christmas, company A has flopped. You sell your 1000 shares for only £1 each.Oops. You do nothing else with your investments, and declare a capital loss to the tax people of £9000 for that tax year to carry forward.

In year 2, company B booms.
You sell 500 of your shares in it for £60 each. A profit of 500*50=25000. You keep the rest of your company B shares.
In your tax return you note your gain of 25000. You deduct the 9000 loss from the previous year that you'd notified them about at the time. You deduct your annual cgt allowance (is it £12000??) To leave a taxable amount of £4000 on which you pay cgt at the appropriate rate dependent on the amount of your other income

It's currently £12,300, and actually you do it the other way round, which may seem (indeed, is) the same for your example, but you can see the difference if instead you ...

Sell 300 of your shares in B for £60 each. A profit of 300*£50=£15,000. You first deduct your annual CGT allowance of £12,300 leaving £2,700 of potentially taxable gain for that year but you then "use" £2,700 of your rolled forward £9,000 loss against that to leave a taxable gain of £0 for that year -- and a further carried forward loss of £6,300 for use in some future year(s).

Gengulphus
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Re: CGT Please Help Me To Understand

#419299

Postby Gengulphus » June 13th, 2021, 4:46 pm

mc2fool wrote:
Midsmartin wrote:I think the above is clear. Here's an example.
You purchase 1000 shares for £10 each in both company A and B in May in year 1.
By Christmas, company A has flopped. You sell your 1000 shares for only £1 each.Oops. You do nothing else with your investments, and declare a capital loss to the tax people of £9000 for that tax year to carry forward.

In year 2, company B booms.
You sell 500 of your shares in it for £60 each. A profit of 500*50=25000. You keep the rest of your company B shares.
In your tax return you note your gain of 25000. You deduct the 9000 loss from the previous year that you'd notified them about at the time. You deduct your annual cgt allowance (is it £12000??) To leave a taxable amount of £4000 on which you pay cgt at the appropriate rate dependent on the amount of your other income

It's currently £12,300, and actually you do it the other way round, which may seem (indeed, is) the same for your example, but you can see the difference if instead you ...

Sell 300 of your shares in B for £60 each. A profit of 300*£50=£15,000. You first deduct your annual CGT allowance of £12,300 leaving £2,700 of potentially taxable gain for that year but you then "use" £2,700 of your rolled forward £9,000 loss against that to leave a taxable gain of £0 for that year -- and a further carried forward loss of £6,300 for use in some future year(s).

Technically, you use losses and the CGT allowance as follows:

1) Offset losses realised in the same tax year against your realised gains. This is done as far as possible, all the way down to zero if you've got enough losses; if you still have same-year losses left after that (i.e. if you have more losses realised in the tax year than gains, you carry the remaining losses forward into the following tax year.

2) If after step 1 your remaining gains are bigger than the CGT allowance and you have losses brought forward from the previous tax year, then you offset your brought-forward losses against your remaining gains until either you've used all your brought-forward losses or your gains have been brought down to the CGT allowance. If the latter happens first, you carry any remaining brought-forward losses forward again.

3) If your remaining gains after step 2 are less than the CGT allowance, the CGT allowance reduces them to zero (so that the part of the CGT allowance that isn't needed to do that is 'wasted'). Otherwise, you subtract the CGT allowance from those remaining gains.

So you do actually first subtract brought-forward losses and then subtract the CGT allowance - but the subtraction of brought-forward losses is limited to prevent it uselessly offsetting gains that are going to be covered by the CGT allowance anyway. Currently, your calculation produces the same result as this in all normal circumstances, and indeed in all circumstances I'm aware of - but that's not a guarantee that it does so in all circumstances! And there have been times when they didn't produce the same results in all circumstances - the last such time that I'm aware of is the 2007/2008 tax year. That was because a 'taper relief' that existed at the time could reduce the gains between steps 2 and 3, so that the remaining gains after step 2 could be the CGT allowance, but some of the CGT allowance ended up being 'wasted' in step 3...

So this is a rather academic technical point at present, but it has been rather more important at some times in the past and might become so again in the future.

Gengulphus

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Re: CGT Please Help Me To Understand

#419302

Postby nmdhqbc » June 13th, 2021, 5:04 pm

on my 2019/20 return there's - "48: Losses used against an earlier year's gain"
could that imply you can claw back some previously paid capital gains tax when you make a net loss? seems too good to be true though. can anyone dash my low level hopes here?

Gengulphus
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Re: CGT Please Help Me To Understand

#419321

Postby Gengulphus » June 13th, 2021, 6:56 pm

nmdhqbc wrote:on my 2019/20 return there's - "48: Losses used against an earlier year's gain"
could that imply you can claw back some previously paid capital gains tax when you make a net loss? seems too good to be true though. can anyone dash my low level hopes here?

Page CGN 8 of https://assets.publishing.service.gov.u ... s_2021.pdf has this to say:

Box 48 Losses used against an earlier year’s gain

This box only applies in limited circumstances. For example, when someone dies.

For more information, go to http://www.gov.uk and search for ‘HS282’.
To find out about carrying back losses to earlier years, go to http://www.gov.uk/hmrc-internal-manuals ... ins-manual

I suspect that dashes your hopes - but only you know the full circumstances and can determine whether it applies...

Gengulphus

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Re: CGT Please Help Me To Understand

#419336

Postby nmdhqbc » June 13th, 2021, 8:44 pm

Gengulphus wrote:I suspect that dashes your hopes - but only you know the full circumstances and can determine whether it applies...


yeah, i guess i'll stick with my current car for a couple more years. thanks for that.

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Re: CGT Please Help Me To Understand

#419602

Postby DaveP » June 15th, 2021, 7:01 am

Folks, many thanks - that has pretty much confirmed my thoughts.

EthicsGradient
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Re: CGT Please Help Me To Understand

#420830

Postby EthicsGradient » June 19th, 2021, 11:32 pm

DaveP wrote:For the sake of simplicity, please assume that I invest everything into a single fund.

For giving examples, using one fund is fine. But remember that, in reality, using more than one fund in this kind of situation gives you more choices on how to use the maximum of the annual CGT allowance, which you may well find useful if the lump sum is "way above the ISA threshold". You might find that a single fund does not make much of a gain in one year at all, but then exceeds the CGT allowance in another. With more than one fund, there's a better chance that some will makes gains each year that allow you to use that year's allowance.

And the funds outside the ISAs should be held by both you and your spouse (on a joint account, a gain will be split 50-50; or you can have separate accounts), so that you can both use your annual CGT allowance. Separate accounts would allow you to do a 'bed and spouse' sale and rebuy to fully use your CGT allowance, whatever you put into your ISAs (eg you initially buy fund A, your spouse fund B, and they both increase in value; before the end of the tax year, you sell some A and use the money to buy B, and vice versa for your spouse. Overall, you own the same funds, but have used your CGT allowances, and have reset the cost for some of your funds to a higher amount, so in the future there's less gain you're liable for).

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Re: CGT Please Help Me To Understand

#420842

Postby GrahamPlatt » June 20th, 2021, 1:17 am

Just to go off at a bit of a tangent re the annual CGT allowance. This is often decried as being an unfair gift to the rich. But before the CGT allowance came into being, there used to be systems called Indexation relief and Taper relief.
So say you’d bought some shares 20 years ago, and sold them this year at double your original cost, you’d have barely kept pace with inflation. These old “reliefs” took this into consideration, but were rather a pain to calculate.

https://researchbriefings.files.parliam ... N00860.pdf

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Re: CGT Please Help Me To Understand

#420865

Postby Gersemi » June 20th, 2021, 10:48 am

GrahamPlatt wrote:Just to go off at a bit of a tangent re the annual CGT allowance. This is often decried as being an unfair gift to the rich. But before the CGT allowance came into being, there used to be systems called Indexation relief and Taper relief.
So say you’d bought some shares 20 years ago, and sold them this year at double your original cost, you’d have barely kept pace with inflation. These old “reliefs” took this into consideration, but were rather a pain to calculate.

https://researchbriefings.files.parliam ... N00860.pdf


Actually the exempt allowance was first introduced in 1977 when it was £1000. Indexation allowance was replaced with taper relief in 1998 and this was abolished in 2008 (when the allowance was £9200). Capital Gains Tax was first introduced in 1965.

https://assets.publishing.service.gov.u ... ble_A1.pdf

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Re: CGT Please Help Me To Understand

#420871

Postby ursaminortaur » June 20th, 2021, 11:07 am

GrahamPlatt wrote:Just to go off at a bit of a tangent re the annual CGT allowance. This is often decried as being an unfair gift to the rich. But before the CGT allowance came into being, there used to be systems called Indexation relief and Taper relief.
So say you’d bought some shares 20 years ago, and sold them this year at double your original cost, you’d have barely kept pace with inflation. These old “reliefs” took this into consideration, but were rather a pain to calculate.

https://researchbriefings.files.parliam ... N00860.pdf


The CGT allowance existed long before Indexation relief and Taper relief were abolished.

https://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_Kingdom

The main reliefs from capital gains tax in the UK is private residence relief, which brings an individual's principal residence out of scope of the tax, and personal possessions with a value of less than £6,000.[1] There are also exemptions for holdings in ISAs or gilts. Certain other gains are allowed to be rolled over upon re-investment. Investments in some start up enterprises are also exempt from CGT. This means that most asset sales do not incur any capital gains tax. Allowable costs include the costs of sale of the asset and capital losses realised in the same year may be used to reduce capital gains made on other assets.

In 1977, there was a general exemption for individuals from paying any tax if gains were less than £1,000 in any given tax year, which runs from 6 April to 5 April in the United Kingdom. Now known as the Annual Exempt Allowance, this has generally risen steadily ever since and the rate for trusts has always been half of the threshold for individuals, so it was £500 in 1977. The rate for individuals in 2020–21 is £12,300 for individuals and £6,150 for trusts.[4]

Labour Chancellor Gordon Brown replaced indexation allowance with taper relief in 1998 to reward risk taking and promote enterprise.[1] Taper relief was abolished in 2008. Indexation allowance generally reduced the tax payable on a gain by increasing the cost of the asset in line with inflation. Taper relief reduced the tax payable on assets that were owned for longer periods of time and its removal was caused, at least in part, because the UK government felt that private equity firms were making excessive profits by benefiting from overly generous taper relief on business assets.


This table shows the CGT allowance (annual exempt amount) over the years as well as the rates

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/908636/Table_A1.pdf

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Re: CGT Please Help Me To Understand

#420879

Postby Alaric » June 20th, 2021, 11:18 am

Gersemi wrote:Actually the exempt allowance was first introduced in 1977 when it was £1000.


Would there have been some form of de minimis relief between 1965 and 1977?

1977 was around the time when there was a mass public sale of the government's excess holding of BP shares, something of a prototype for later privatisation. If you held shares purchased for £ 100 and sold for £ 110, I imagine neither the holder nor the Inland Revenue would want the palaver of trying to declare, find and collect £ 3 in taxation.

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Re: CGT Please Help Me To Understand

#420890

Postby GrahamPlatt » June 20th, 2021, 11:44 am

Gersemi wrote:
Actually the exempt allowance was first introduced in 1977 when it was £1000. Indexation allowance was replaced with taper relief in 1998 and this was abolished in 2008 (when the allowance was £9200). Capital Gains Tax was first introduced in 1965.



So 1977-2008, so more than doubling every decade (~7.5% pa)
2008-2021 and it’s gone up by about 33% in total (~2.5% pa).

There’s fiscal drag for you. Though to be fair, not too shabby given the low inflation over the period.


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