After all, you get a tax-free capital gains allowance each year – currently £10,600 – and there are also ISAs and pensions that you can tuck money into and so entirely protect it from capital gains tax.
Besides, who makes capital gains anymore? With everyone obsessed with falling share prices rather than the intermediate strong rallies we’ve seen over the past decade – and ignoring what the steadily lowered multiple put on shares might imply for future returns (clue: good stuff) – the only game in town these days seems to be dividend income.
Capital gains are so 1990s!
Finally, capital gains tax is only liable when you sell an investment. Don’t sell, and you don’t have to pay it. Simples!
In reality, capital gains tax (CGT) can sneak up on you unless you take steps to avoid it (not evade it, which is illegal).
- You might have bought shares outside of an ISA earlier in your investing career, before you knew any better.
- You might be saving more than the ISA allowance each year and you don’t like pensions, so you invest the rest unsheltered.
- Maybe you don’t like spreadbetting either, which is also CGT-free.
- You might have railed against tax avoidance strategies due to your softheaded leftist leanings – until you face paying it, which tends to focus the mind.
- You could have long-term holdings – perhaps a portfolio of dividend-paying blue chip shares – where the capital gains have crept up on you, because you didn’t defuse them over the years, and so wasted previous annual allowances.
- You might own growth, tech, or mining shares that ‘multi-bag’. Such massive winners are rare, but they happen, and even a few thousand pounds can turn into a CGT liability when you sell a share that’s gone up tenfold.
- You planned to hold your shares forever – or to slowly realise your gains over several years – but circumstances change and you need to sell now.
- A company you own might be acquired and not provide any tax mitigation strategies, which forces you into crystalising a gain.
- Unit trusts and other collective funds can also be shut down without much warning, again causing a long ignored gain to become a problem overnight.
- You might even sell another kind of taxable asset, such as a stake in a private company or a buy-to-let property, where it is difficult or impossible to gradually defuse the gain over the years without Jimmy Carr-style avoidance schemes.
CGT is payable annually at 18% or 28% (or at 10% if you qualify for entrepreneur’s relief). See my article on UK capital gains tax.
If you have made a gain and you don’t qualify for entrepreneur’s relief or similar, you’d better start limbering up your cheque-writing hand.