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Act now to defuse capital gains on shares

Defusing capital gains tax timebomb

There are several theories as to why the UK tax year runs from April 6th to April 5th, instead of following the normal calender year.

Most blame the switchover from the Julian to the Gregorian calendar in 1752, and the Treasury’s desire not to lose a single penny in the kerfuffle. The Inland Revenue website provides no official justification – though it does offer an interesting history of income tax, which was originally only a temporary measure to finance the Napoleonic Wars!

Anyway, I sometimes wonder if the esoteric UK tax year is maintained just to confuse people who might otherwise take steps to avoid paying tax, especially capital gains tax (CGT).

After all, the Irish changed their tax year to the calendar year in 2002. How hard can it be? (On second thoughts, perhaps Ireland is not the greatest of financial role models).

The key to defusing capital gains

Keeping the tax year in mind isn’t just important for making sure you have everything in order when it comes to submitting your details to the Inland Revenue (and you must – life’s too short for a tax investigation).

The end of the tax year is also a critical date for investors who hold shares or funds of any significant value outside of tax-sheltering ISAs and pensions.

This is because every tax year you’re permitted to make a certain amount of capital gains before tax becomes payable: £10,100 each year as I write.

It makes sense to use as much of this capital gains tax allowance as you can each year.1 By doing so, you can defuse ongoing capital gains tax liabilities, and so reduce or even avoid heftier capital gains tax bills in the future.

The allowance cannot be carried forward if unused – it’s case of use it or lose it.

Wealth warning: Tax law is very fiddly, and full of exemptions and caveats. This article should be thought of as a general introduction to the concepts, NOT advice from a tax professional. In particular, if you want to do anything out of the ordinary (e.g. give your partner shares to save dealing fees or similar) then you’ll need to do more research and possibly pay for some professional tax advice.

How to defuse your capital gains

There’s nothing complicated involved in defusing capital gains on shares, though it pays to do it carefully and to keep good records, both to get the maths right and also in case you’re required to submit details to HMRC.

The basic idea is to be sure you sell enough shares or fund holdings that are sporting capital gains in order to use up as much of your annual capital gains tax allowance as you can.

Remember: It’s not a taxable gain until you actually sell the shares.

Step 1: Calculate your total capital gains so far

The first thing to do is to determine what gains if any you’ve already made from trading shares, funds, or any other chargeable assets this tax year (i.e. starting last April 6th).

Here’s where your records (or your online broker’s statements!) come in handy.

You need to see every sale you made over the tax year (regardless of what you did with the money afterward) and work out your total capital gains.

  1. Any share holding or fund (outside of ISAs or pensions) that you sold for more than you paid for it has made a capital gain.
  2. Subtract the purchase value and any costs (such as dealing fees) from the sale proceeds to work out the capital gain you made.
  3. Add up all these capital gains to work out your total capital gain for the year.

Note that shares and funds are not the only chargeable assets for capital gains tax. You need to add all such capital gains into your total for the year, since they all count towards your personal CGT allowance.

For instance, any property other than your main home that you sell is potentially liable for capital gains tax. (Property is a whole other post; for now, see the HMRC pages on property gains if you need to).

Some commonplace assets are exempt from CGT, including:

  • Your car
  • Personal possessions worth £6,000 or less
  • Cash held in sterling, and foreign currency held for personal use
  • Savings Certificates, Premium Bonds and British Savings Bonds
  • UK Government bonds (gilts)
  • Betting, lottery, or pool winnings
  • Shares in an Enterprise Investment Scheme (EIS) company or a Venture Capital Trust (VCT) (provided you’ve met the qualifying terms).
  • Shares held in an approved Share Incentive Plan
  • Personal  injury compensation
  • Any assets you hold in an ISA or pension

Step 2: Calculate your capital losses, if any

What if at any point in the year you sold shares, funds, or a dodgy buy-to-let flat for less than you originally paid?

  1. In this case, you’ve registered a capital gains loss.
  2. Add up all such losses you made over the year to get your total loss.
  3. Note that loss-making sales of the exempt assets I listed above don’t count towards capital losses, either!

Happily, totaling losses isn’t just an exercise in self-flagellation. The one good thing about these losses is you can set them against your gains.

For instance, if you made £14,000 in capital gains from share disposals over the year, and you made capital losses of £6,000, then your total gain is £8,000 – which is less than your CGT allowance.

One ironic cheer for losing share trades!

Note that you can also offset capital losses from previous years, provided you notified the Inland Revenue via your tax return of the loss.

  • See this HMRC page for more on such losses.

Step 3: Consider selling more assets to use up more of your allowance and so defuse future gains

You should now know what your total capital gains for the year are (from step 1), after subtracting any capital losses (from step 2).

  • If your total gains are higher than your CGT allowance, then you’re set to have to pay capital gains tax on the gains above the allowance. Before the tax year ends, you could consider selling an asset you’re currently carrying at a loss in order to crystalize that loss and set it against your gains. This will reduce your CGT bill (or even take you back below the allowance).2
  • If your total gains are less than your CGT allowance, then you won’t have to pay any capital gains tax on those gains. Before the tax year ends, you could consider selling other assets you’re carrying that are showing a capital gain, in order to use up more of your CGT allowance for the year – without going over it, of course! By doing so, you ‘defuse’ some of the gains you’re carrying, which may help you avoid exceeding your allowance in future years.

Note: There is a fine line between taking sensible steps to avoid a higher tax bill and allowing tax to sway your investing. In practice, I think the average private investor can do a fair bit of selling to defuse CGT, since most of us can repurchase the assets within an ISA or pension (see below) without derailing our strategy. But always remember CGT at least proves you made a profitable investment! I’d far rather pay tax than not make profits…

Step 4: Reinvest any proceeds from sales

If you made any sales in step 3 to finesse your capital gains position, then you will now want to reinvest the money you raised, rather than blow it all on pizzas and fast cars.

  • Ideally you’d reinvest the money within an ISA or pension, so putting that money beyond the reach of capital gains tax for good. You can hold most tradeable assets in these vehicles – including the specific company shares or funds you just sold. Also remember that an ISA allowance is another ‘use it or lose it’ affair – and that a new allowance kicks in on April 6th.
  • If your ISA allowance is already used up, you don’t want to earmark the money to fund next year’s ISA, and you don’t want to or can’t add any more to your pension, then you can reinvest the money in a different asset as soon as you’ve completed your sale. This new investment starts with a clean slate for capital gains tax purposes.
  • However, if you want to reinvest in the same share or fund outside of an ISA or pension, then you need to wait 30 days before you do so. If you flout this so-called ’30-day rule’, then for tax purposes the holding is treated as if you never sold it – and so you fail to realise (and defuse) the capital gain. Back to square one, do not collected £200!
  • Alternatively, if you’re married and you can’t stand for your household to lose exposure to that specific and presumably super-hot asset for even 30 days3, then you can sell it and your spouse could repurchase the same asset in the market in his or her own account. Both spouses have their own capital gains tax allowance, and the new holding starts ‘fresh’ from a CGT perspective.

Costs: One other complication we shouldn’t ignore

We shouldn’t skim over this final issue, but I’m going to because this is already a monster post and I’m sure you’ve got funny cat videos on YouTube to be watching.

This can’t-ignore factor is the cost of trading – both in terms of your dealing fees and any stamp duty you pay on reinvesting the money, and also the bid/offer spread on the ‘churn’ of your holdings.

Aside from your dealing fees, the friction that this churn hits you with will largely depend on the nature of the asset you’re selling: Is it a very liquid ETF with a small spread, a micro-cap company with a large spread, or a fund with (please say it ain’t so!) high initial fees?

Such costs can significantly reduce the benefits of defusing gains in your portfolio for tax avoidance purposes, especially on small sums, and even more so if you’re only liable for CGT at the lower 18% rate.

For this reason and others, realizing capital gains is best done as part of your rebalancing strategy, when you’ll likely be spending money to reduce your holdings in outperforming assets and adding to the laggards, anyway.

You’re going to have to run your numbers for yourself, since personal circumstances will vary. I’d generally favour defusing some gains where possible, but you should do so in an intelligent manner.

Think of it partly as an insurance policy: You may as well use the allowances you’ve got now, in case in the future you’ve got more money and more gains, but not more allowances!

Further reading:

  • Check out HMRC’s page on reporting capital gains to see whether your overall trading activities mean you need to report your gains and losses, even if your total capital gain is less than your allowance.4
  1. Do not confuse this allowance with your personal income tax allowance. It is a separate allowance. []
  2. Note that if you have made an overall capital loss rather than a gain, then you should note this on your tax return, as it can be used to offset against future profitable years. []
  3. Please do let us know this hot tip in the comments on Monevator! []
  4. At the time of writing, if you sold chargeable assets amounting to four times or more your personal allowance, then you will need to complete the capital gains pages of the Self Assessment form, even if you have not exceeded the allowance. []

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{ 26 comments… add one }
  • 1 ermine April 4, 2011, 8:55 am

    > Shares held in an approved Share Incentive Plan

    Are you sure about this? I’m under the impression that both shares purchased out of pretax income and share options purchased from post tax income are liable to CGT. Though I’ve maxed these the performance of my company has never been such to produce such a gain, but this is likely to happen in a year or so on one scheme because the option price was particularly low.

    I normally sell sharesaves immediately on maturity if the options are in the money, because I don’t want exposure to my employer in my shareholdings because if they do badly and I lose my job I lose share value too, but this forthcoming one I will probably have to half-sell specifically because of CGT issues 😉 And certainly the blurb that come out on what to do with maturing options seems to indicate CGT may need to be considered if selling.

    Or are these share incentive plans the sort of thing used for City bonuses etc, rather than the sharesave/share incentive plans targeted at the wage-slave proles?

  • 2 The Investor April 4, 2011, 12:26 pm

    @ermine — Thanks for the info, and no I’m not sure. I was going on an accountants comment and hesitated to include the entry due to my lack of personal experience with them, but then thought leaving them out might cause some readers issues too.

    I’ll try and do some more research at some point, and would gladly welcome more informed comment here in the meantime! 🙂

  • 3 Marc April 4, 2011, 1:42 pm

    I think you might mean diffuse rather than defuse?

  • 4 The Investor April 4, 2011, 3:09 pm

    @Marc – Nah, I mean defuse. Like removing the explosive potential of a ticking time bomb.

    I didn’t coin the term with respect to CGT, though I don’t think it’s widely used. I think it’s apt.

  • 5 ermine April 4, 2011, 10:24 pm

    This Proshare fact sheet seems to indicate CGT is liable on sharesave (a.k.a. Save As You Earn) schemes 🙁 Haven’t managed to track down a definitive statement on ESIPs

  • 6 The Investor April 5, 2011, 8:28 pm

    @Ermine – Thanks for that. I’ve been having a torrid time trying to work out the cost price of some shares I bought and sold regularly starting a decade ago (including fractional holdings and reinvested dividends to boot!) for capital gains tax reporting purposes.

    Which is a way of saying:

    1) I will research more when I get more time.

    2) Really, everyone, use ISAs to save paperwork someday or else SIPPS if you are pretty sure you won’t need the money before retirement.

    Even if you’re just starting out. One day you won’t be, and even under the new easier rules CGT is a PITA.

  • 7 Gadgetmind April 8, 2011, 12:22 pm

    Yes, ISA are great, and so are SIPPs, but both suffer from annual limits, and those limits have swung around in complex ways for SIPPs over recent years.

    My “7 year plan” to (hopefully) retirement shows us ending up with about 50% of our pot in pensions, 25% in ISAs and 25% outside ISAs in assets that generate dividend income as my wife is a basic rate tax payer.

    Fingers crossed!

  • 8 emma worrow January 19, 2013, 9:30 am

    Please could you confirm that if I bought £10000 worth of shares in a shares ISA and then they increased in value to £50000, am I right in saying that I would not have to pay any CGT on that £50000?
    Many thanks.

  • 9 The Investor January 19, 2013, 10:05 am

    @Emma — That’s correct. Capital gains in an ISA are NOT taxable. You might want to read this article:

    http://monevator.com/avoiding-capital-gains-tax/

    Just to be pedantic, please note I can’t ‘confirm’ anything as such, because I’m just a writer. The best place to get confirmation is HMRC. 🙂

    However they will tell you what I have told you. (I will however underline it — ISAs are great! 🙂 )

  • 10 Chris March 28, 2015, 12:05 pm

    Thanks for this article TI. I just want to know as I couldn’t see you cover this bit clearly whether you have to do a tax return in order to claim the capital gains allowance or whether you simply keep records for yourself which you seemed to suggest but then also you mentioned when you send your tax return in one part which suggests you have to do this every year even when you are well under the limit?

    I feel pretty silly for misunderstanding this. I assumed that if your fund was making less than £11,000 a year then there was no tax etc so an ISA was only better if you had a large amount of money in a fund or if you were in a higher income tax bracket. If we do a buy and hold strategy for 25 years outside of an ISA, we would likely be hit with a huge tax bill if we were not selling the fund units every now and then to use the allowance.

    I’m in the fortunate position whereby I will likely be able to max out my ISA every year from saving a £1000 a month leaving a couple thousand and will therefore need to keep over £40,000 in a standard share account using iWeb for many years which brings me these concerns.

    Many thanks,
    Chris

  • 11 The Investor March 28, 2015, 2:05 pm

    @Chris — From memory you have to fill in the capital gains pages of the Self Assessment tax return if you realize gains in one year of over the personal CGT allowance of £11,000 and/or if you dispose of CGT-taxable assets worth more than 4x the annual CGT allowance.

    The reason I always have to think about CGT is I am always defusing CGT on assets as described above. However most years I try to dispose of less than 4x the allowance (so £44,000 currently) so I don’t need to get involved in declaring it to HMRC — just because the paperwork is so tedious. This means that effectively my ex-ISA/SIPP holdings are long-term buy and hold in the past few years.

    I suggest you try to be specific in your language. You say “if your fund is making less than £11,000 a year”. That’s not the way to think about it. You need to think about income and capital gains, as different components of the return, for your own clarity as well as understanding the rules and so forth.

    Note — as I think you understand but just in case — you are only liable for CGT when you realize (i.e. Sell) an asset. Until then you can enable the capital gains to roll-up:

    http://monevator.com/deferring-capital-gains-to-reduce-your-final-tax-bill/

    …which helps, but I think it’s clearly better to defuse what you can as you go to make use of your personal allowance every year.

    Please note I’m not a tax advisor and I *cannot* give personal advice as to what you or anyone else should do, so this is just for your further info/research. See a fee-based hourly ETF if you need to! 🙂

    Good luck — always worth remembering that CGT is a nice problem to have, especially as some day a bear market will come along again… 😉

  • 12 Chris March 28, 2015, 2:35 pm

    Thanks for your reply TI. I never used to understand the difference between income and capital gains as much as I do in recent times. That article helps too yes. i could not find them for some reason.

    My fund is an accumulation fund just to note. I would think that if my current Vanguard life strategy 60% fund (Non-ISA) has £46200 (2x seperate buys to make matters easier) and I will be selling £3000 worth of units a year that will go into an ISA (same fund) so don’t need to wait 30 days as I read. I will not be making over the allowance of £11,000 for sure so likely will not need to be worried about this as I do not intent to ever Invest in Non-ISA wrapped investments again.

    As this will take over 10 years though, I will need to keep aware of any tax changes that come about. I think my main concern/question here now is as I currently do not file any tax return / self assessment etc as I am not self employed and do not have any investments earning me an income of any real value. I should not need to send anything to HMRC. I just should keep track of what I do in case at any point in the future it needed to be reviewed. If that is too specific and not general enough for you to answer then I understand.

    Like you say, it’s a nice thing to have to worry about as opposed to where the next meal is coming from or how I’m going to afford the next rent payment.

    Chris

  • 13 The Investor March 28, 2015, 3:04 pm

    @Chris — You can sell outside of an ISA and buy the same thing *inside* an ISA and not have to worry about the 30-day rule. (Google “Bed and ISA”.) The 30-day rule is only relevant if you’re rebuying the same assets outside of an ISA or SIPP, and yet reducing the cost basis (i.e. Defusing the capital gains).

    Yes, far FAR better to keep all your money in ISAs and SIPPs if you can. 🙂

    I think your understanding of the tax situation is accurate, but keep an eye on the gains on the LifeStrategy fund. You should know exactly what capital gain you’ve made on the assets you dispose of. Over 10 years, it’s not impossible the units you bought in your fund could double or even triple in value.

    You just need to work out every year the capital gain on the units you dispose of, and make sure it’s under £11,000 / you’re disposing of less than £44,000 (assuming you’re not disposing of other assets elsewhere).

    Again, I am saying “You” but you could read it as “one has to make sure” as I don’t know your specifics, and can’t give you personal advice — this is just to help you understand for your own research.

  • 14 Chris March 28, 2015, 3:12 pm

    I hoped my questions were more general and not too personal. Thanks for your answers. I agree with checking carefully the gains that are made on a yearly bases to ensure that I will not be creeping towards the CPT allowance limit. I don’t think I would be too gutted if it were I were earning over this to be fair though :).

    Thanks very much!
    Chris

  • 15 Gavin May 29, 2015, 12:19 am

    Hi. Great article but I do have one question. Say my total gains from selling shares is £6,000 which is under the £11,000 allowance. Say that I also have £2,000 in losses. Am I required to offset the gains with the losses or can I elect to carry forward the £2000 into the future?

  • 16 Richard January 13, 2016, 1:10 pm

    Hi Gavin

    Per HMRC you offset your reported losses against your reported gains. You do not have to report your losses in the year in which they occur – you can delay reporting them for 4 years and then offset them in the year you report them.

    Obviously if you do not report a loss in the year you incur it you’ll have to remember to declare it later.

    At least that’s my reading: http://www.gov.uk/capital-gains-tax/losses

  • 17 Neil April 5, 2016, 8:11 am

    Very helpful article. If you defuse CGT by selling and rebuying the same share within 30 days I get that the tax man considers it a continuous purchase. What if you subsequently gift those re purchased shares to your spouse? When they sell them do they just sell at their prevailing rate or does it get tracked all the way back to your initial attempt to defuse CGT? In trying to find out if that is a legitimate way to defuse CGT or not! Thanks!

  • 18 Phil April 10, 2016, 1:21 am

    Hi.

    Might be a very silly question but I accrued a CGT amount of 11k on sale of a second property in April 15. I am currently running a similar amount loss in shares. Can I sell and offset even though they are in 2 different tax years please?

  • 19 Richard April 10, 2016, 12:11 pm

    Hello Phil

    I don’t believe that you can carry CGT losses backwards (i.e. to extinguish gains from previous years). You can carry losses forward – but you have to declare them on your tax return to be able to do this.

    Thus in your case the answer is “no” – because the gains came in the year before the losses. If the opposite was true and the losses came first then, yes, those losses could be carried forward to extinguish future gains.

    The CGT exemption in 2015/16 was £11,100, I think, so hopefully you didn’t pay any CGT last year. (And there’s no CGT at all on shares held in ISAs or pensions.)

    If you sell your shares to crystalise your loss then you can carry this forward – which will only be of benefit if you think you will have any future gains (outwith ISAs, pensions, principle private residence, etc).

    Cheers

    Richard

  • 20 Phil April 10, 2016, 3:02 pm

    Thanks. Bad news but a very educational clarification. Just going to have to pay up 🙁 Don’t think that I will have any more CGT gains next year to offset this one.

    Thanks for your prompt reply.

    Regards

    Phil

  • 21 John April 16, 2016, 9:41 am

    hi if you get your dividends as scrip shares, how does that equate to the new 5000 dividend tax allowance from 2016? thanks john.

  • 22 The Investor April 16, 2016, 9:47 am

    @John — I don’t know, is the short answer, and haven’t seen commentary on it. My inclination though is that they will be counted towards the Dividend Allowance, for two reasons.

    Firstly, if they’re not then it’s a tax loophole that’s going to be exploited.

    Secondly, scrip share distributions are already treated as equivalent income. See:

    https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim5150

    Please remember I’m not a professional adviser, so do your own research! (And let us know what you find… 🙂 )

  • 23 Pete R January 8, 2017, 2:12 pm

    Thanks for the article, but you don’t mentioned profits on spread betting. I hold a few shares in far dated spread bets (so they don’t need to be rolled every night). Some with many £000’s of gains but absolutely none are liable for CGT.
    Well worth mentioning in my view.

    Cheers

  • 24 The Investor January 8, 2017, 4:03 pm

    @Pete R — Hi, glad you liked the article. Spreadbetting for tax avoidance is a different matter really, this article is about defusing gains you already have (which in my experience some people with investments outside of tax shelters don’t even think to do, leaving the annual allowance going begging every year).

    We’ve covered spreadbetting in the manner you suggest here:

    http://monevator.com/spread-betting-tax-avoidance-strategies/

  • 25 Scott March 27, 2017, 4:07 pm

    I mistimed a rather risky investment back in August last year. I’m currently making a £5k loss. If i was to sell these shares before April at a loss to offset CGT, and then reinvest the remains into my ISA. If these shares were to recover, i’d have shielded the gains from tax, but would i still be able to offset my CGT balance with the loss i incurred in my stocks and shares account?

  • 26 The Investor March 27, 2017, 4:26 pm

    @Scott — I can’t give personal tax or investing advice. However as a general point, once money goes into the ISA it effectively disappears from HMRC’s radar (of course you must follow the rules and only put in your annual ISA allowance per year etc). Your investment gains (and losses) in there are not reportable.

    I don’t mean this in any dodgy sense. I mean that’s by design. It wouldn’t matter if one made new gains in the ISA in the same shares you sold outside of the ISA or in anything else. It’s irrelevant. You don’t need to tell anyone.

    Losses on taxable gains (i.e. outside of ISAs/pensions) are set off immediately against gains (outside of ISAs or pensions).

    You may be thinking of the ’30-day rule’, which prohibits one from declaring losses on assets you buy back within 30 days?

    This doesn’t apply if you’re buying back in an ISA. The technique that exploits this is call ‘bed and ISA’, and is effectively what you’re describing. There’s a few articles around on this, have a Google. For example:

    http://www.tisa.uk.com/newsletter.html?newsletter_id=9

    One other general point — remember in investing you don’t have to make back your money the same way you lost it. 🙂

    Cheers!

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