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How to offset capital gains with losses to reduce your tax bill

It’s prudent not greedy to try to reduce CGT, given how taxes reduce your compounded return over time.

You might think that capital gains tax (CGT) will never apply to you. And if all your investments are in ISAs, SIPPs, or your own home, then you could well be right.

But let’s say for whatever reason you’re forced to realise a capital gain (or more likely gains, plural) big enough to take you over your CGT allowance for the year.

One simple emergency response is to consider offsetting your capital gains with capital losses where possible, to reduce the tax you’ll pay – even if it means selling shares or other assets that you had planned to keep for the long-term.

This ‘crystalising’ of losses is a very straightforward way to reduce your CGT liability, yet it’s often forgotten or misunderstood.

The key is you’re charged CGT on your total taxable gain for the year, which is:

The total gains on your profitable taxable investments1
minus applicable losses on investments that lost money2
minus any reliefs
minus your annual capital gains allowance

= Your total taxable gain

In other words, if as well as the gain (profit) you’ve made, you’re also showing losses on other taxable investments – such as shareholdings that have fallen in value – then by selling them too and offsetting those losses against your gain, you can reduce and maybe even eliminate your CGT bill.

Losses in ISAs and SIPPs don’t count: Remember, you can only offset gains using losses on taxable assets. (See my article on capital gains tax for an explanation of what counts as a ‘taxable asset’). RBS shares held in your online dealing account that are down 50% since you bought them can be set against gains if you sell them. RBS shares held inside your ISA cannot (just as they would not be liable for CGT if they rose).

At the risk of belaboring the point, the crucial thing is you must realise/crystalise your losses to use them.

It’s no good – for tax purposes – having a portfolio of clunkers sitting in the red in your dealing account that you’re waiting to come good again. Those losses don’t count until sold.

You have to dump the devalued shareholdings, take the loss on the chin (keeping a record for the taxman) and then tot up all the losses and subtract them from your gains to calculate your (now lowered) total capital gain for the year.

This isn’t rocket science, but I’ve seen people say it’s not worth it, or not understand how it works, or not think to do it – all mistakes, in my view.

If you’re going to pay a taxable gain and have potential losses to hand, then realising and offsetting those losses against that gain is free money.

Note: If you make an overall loss in a tax year, after subtracting losses from gains, then you should inform HMRC when you submit your tax return, so you can carry this loss forward to reduce gains in future years. Losses can be a valuable asset, but only if you tell HMRC!

Worked example of offsetting losses against capital gains

Here’s a made-up example to illustrate how it works.

Imagine you bought shares in Monevator PLC in 2015 for £10,000. You bought them outside of an ISA.

In 2016, a bidding war between Richard Branson and Warren Buffett breaks out for control of Monevator, and your shareholding rises tenfold to £100,000.

Having no faith in the goons running this website, you decide to sell up, take the money, and run.

Your investment has grown to £100,000, so to work out the gain you subtract the £10,000 you initially paid to buy the shares3.

The gain is therefore £90,000.

Subtracting your annual CGT allowance4 from that gain (and assuming you’ve not realised any other gains in the tax year) means you’ve made a taxable gain of:

£90,000 minus £11,100 = £78,900

A hefty tax bill will clearly be due on that £78,900. If it were all charged at the higher CGT rate on shares of 20%, then you’d pay £15,780 in tax.

But wait!

While sitting in a pool of your tears as you lament the demise of your favourite investing blog AND your imminent tax bill, you remember some shares in other companies that you continue to hold that didn’t do so well.

In fact, your dealing account shows you’re currently down £20,000 on your investment in Sky, and you’re also £35,000 underwater on the Daily Mail and General Trust.

You had planned to hold on for a recovery in their prices. But given the imminent tax bill, these shareholdings are probably worth more to you dead than alive.

If you’re paying the higher-rate 20% of CGT, then realising these losses and offsetting them against your CGT gain will ‘earn’ you £200 for every £1,000 of loss.

Note that nobody is suggesting that you make a loss just to reduce your tax bill (well, some US Republican diehards might, but I’m not).

In this example you’ve already made the unprofitable investments. The damage is there already in the losses on your shareholdings. By selling up and offsetting those losses against your taxable gain, you’re reducing the impact on your total wealth.

What’s more, you can reinvest the money you raised from selling your losers, too.

This means there’s a potential double-whammy at work of using the losses to offset your gain, and then seeing your reinvested money rise in value in the future.

Beware the 30-day rule! Note that you can’t repurchase the same company’s shares within 30 days of you selling them and recognising the loss, according to HMRC’s bed and breakfasting rules. If you do repurchase the same assets within 30 days, the loss does not count as crystalised and so cannot be set against your gains.

The 30-day rule means you’d have to wait a month to repurchase exactly the same shares or fund that you sold for a loss to offset that loss against gains. Not likely to be a disaster, but there’s a danger that the market could move against you.

On the other hand the shares or fund might get even cheaper! A month is a pretty short and random time in the markets.

However there’s also nothing to stop you investing the money raised in another share or fund you fancy – perhaps a share from the same sector or even a close competitor – or putting it into a similar but different ETF or fund.

Many active investing Monevator readers will have plenty of ideas for where they’d like to deploy new money, so this influx of cash could be a silver lining to realising losses. Cutting losers and running winners can be a good discipline when active investing, depending on your strategy.

Remember your overall asset allocation though. If you’re a passive investor in broad asset classes, you should ideally be selling winners and adding to losers when you rebalance your portfolio. Tax mitigating operations should only be a side detour in your plan, not a change of direction.

Also note that you can buy back assets you sold for a loss inside an ISA or SIPP without violating the 30-day rule. This is known as bed-and-ISA-ing (for historical reasons). See my article on defusing capital gains tax for more details.

How capital losses reduce your tax bill

Getting back to my example, you’ll recall we were faced with a taxable gain of £78,900.

By selling those two hefty losers and offsetting the losses realised against our gain, the total taxable gain is reduced to:

£90,000 minus £35,000 minus £20,000 minus £11,100 = £23,900.

Let’s say you still fall into the 20% CGT bracket, even on this lower gain.

On £23,900, that works out as £4,780 tax due.

A poke in the eye, but only about a third the size of the bill you originally faced.

Other times using losses will be enough to take you back under the annual CGT allowance, or else may bring you down to the 10% rate if you’re a basic rate payer. So there are potentially lots of advantages here.

Obviously these are just made up numbers, based on a made up example that’s overly simplistic for illustration.

But the takeaway is clear. If you face a capital gains tax bill and at the same time you have unsheltered shareholdings that are showing a big loss, there’s a strong case for selling them to realise the losses to offset them against the gain, even given the hassle and churn costs.

Of course, keep all your passive investments nicely wrapped inside ISAs and SIPPs and you won’t have to worry about offsetting capital gains or defusing them or any other fiddling about.

For the gazillionth time – if you’re investing and not using your annual ISA allowance, then you are making work for yourself, and potentially setting yourself up for hefty capital gains tax bills, too.

  1. Remember, investments only become liable for CGT when they are sold or transferred. []
  2. Similarly, capital gains losses are only crystalised when you sell them. []
  3. I am ignoring dealing fees and other costs here for simplicity. Such costs are also deducted from your sale proceeds when calculating the taxable gain. []
  4. £11,100, rising to £11,300 from 6 April 2017 []

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{ 5 comments… add one }
  • 1 OldPro June 22, 2012, 6:55 pm

    Bit insensitive old boy…! Nobody has bagged a capital gain since 2007…!

    Ok, just pulling your leg…more like 2010.

  • 2 JFH August 21, 2014, 9:34 am

    Could you confirm (or otherwise) your statement “Note that you can’t repurchase the same company’s shares within 30 days of you selling them and recognising the loss, according to HMRC’s rules. But there’s nothing to stop you investing the money raised in another share you fancy – perhaps in the same sector or even a close competitor – or putting it in an ETF or similar (provided it’s not the one you just sold).”

    Reading the following HMRC documents they indicate that the rules might not be as you’ve indicated, but could mean any paired stock purchase/sale within a 30 day period being matched i.e. leaving the only option to sell, wait 30+ days, rebuy (excepting bed and isa, or selling stocks to buy bonds etc.) :

    “CG13370 – Bed and breakfasting: shares and securities”

    http://www.hmrc.gov.uk/manuals/cgmanual/cg13370.htm

    The capital gains tax rules also match a disposal of shares with any acquisition in the following 30 days. See CG51560.

    Note that the share identification rules apply to all assets that usually dealt in without having to identify the individual asset. See CG51500.

    http://www.hmrc.gov.uk/manuals/cgmanual/cg51500.htm

    The issue does not just arise with shares but with any assets that are not distinguishable from each other or are dealt with as if they are

  • 3 The Investor August 21, 2014, 10:02 am

    @JFH — I can confirm I said that. 🙂 But I am definitely not a tax adviser nor a member of HMRC nor even a financial advisor, so if you want and need professional advice, you’ll need to go to one of those.

    However I am satisfied in my own mind that selling shares in a supermarket like Tesco, say, and buying shares in Sainsbury does not go against either the letter or the spirit of the rules.

    Similarly I think there would be no problem with selling a basket of UK blue chips and holding the FTSE 100 as an ETF for 30 days, or vice versa.

    In contrast, selling say the Accumulation units of a specific ETF and buying the income units of the same ETF would as I see it potentially breach the rules.

    Your second link is a red herring. It’s talking about multiple purchases and later sales of exactly the same shares, but purchased at different times and pooled.

    Remember, I stress again, this does not constitute qualified financial advice, it’s a free informational article on the Internet. Seek professional advice if you need it.

  • 4 James Lizard January 29, 2016, 2:46 pm

    Thank you for brilliant and clear article. I’m having to complete a tax reurn with for the first time profit over the CGT limit and a loss to bring it under. Also pleased to hear that I can bed and breakfast to place shares straight into my ISA.

    Many thanks. All very helpful

  • 5 Sam March 10, 2016, 1:14 pm

    Excellent article,

    I never knew about the bed and ISAing rule.

    Sam

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