VCTs and Capital gains

Ainsley1

Some time back Dad had a capital gain and he avoided tax then by buying into a VCT.

I now need to help him in his later life and his memory is not all it was. I know very little about VCTs so if anyone can help it would be appreciated.

My dad now needs to spend some of his investments to help with his costs so will be selling some of his assets. The VCT he has does not seem to be performing as well as some other things so it is a prime candidate for selling.

He tells me ( over a number of conversations) that when he bought the shares he was eligible for an income tax reduction and also able to defer a CGT liability from the sale of an inherited asset.

To help him I need to know what the current position is w.r.t. CGT. If he now sells these VCT shares will he become liable for the tax he deferred, the tax on the gain from this (coming) year's sale, nothing at all or can he use his CGT allowance?

I have told him he perhaps needs expert advice but he will NOT go and see a financial adviser! - The VCT recommendation was not the best, we think as it is no better value now than it was some 10 years ago.

Selling shares up to his CGT allowance (£10.6K this coming year, I note) will not meet his needs but £20 of VCT, if tax free, would tide him over for his care and buy a bit of time.

Any help advice or links to information would really be appreciated.

nomunnofun

I am afraid that it is some time since I delat with VCT's and I would be unwilling to share my 'knowledge' in case it is outdated. However I do note that you mention 'selling shares up to his CGT allowance'. Remember that he has to realise this in PROFIT and so the proceeds could vastly exceed this amount which is, in fact, £10900 next tax year.

Ainsley1

Thanks, comments appreciated regarding CGT allowance size, but it occurred to me that the CG tax avoided previously by buying the VCT shares has only been deferred and that selling the shares now would create that liability this year?

holly_hobby

Can be pretty complex, I've attached a brief HMRC guides for you which should give you the bones to get started or decide if you want to engage a tax practitioner to assist -

http://www.hmrc.gov.uk/guidance/vct.htm

http://www.hmrc.gov.uk/manuals/vcmmanual/VCM53090.htm
.

Essentially the deferrment is revived within the tax yr when the chargeable event arises ie VCT is sold, be that partially or wholly in both cases.

Dad then applies his unused annual CGT exemption/allowance to the revived deferment. plus (generally) he may apply any previously SA reported CGT losses that have occurred in the proceeding 4 yrs.

Revivement and associated calcs etc reported within the CGT pages of his next SA.

Its a basic answer, but should be sufficient to give you the general idea, and whether you will require prof assistance in completion of corresponding HMRC return.

Hope this helps a bit

Holly x

jimmo

Whilst the disposal of VCT shares is exempt from Capital Gains Tax if your dad disposes the whole of the VCT holding the whole of the deferred gain is revived. If he disposes of half of his VCT holding then half of the deferred gain is revived, and so on.

The revived gain is treated as if it was a gain arising on the date of the disposal of the VCT holding and the normal CG allowance can be set against the revived gain.

http://www.hmrc.gov.uk/manuals/vcmmanual/VCM53150.htm

In those circumstances its not so much selling shares to the value of his CGT allowance but, if he wants to avoid CGT altogether, he will need to sell that proportion of his VCT holding that will create a revived gain of £10,900 (the new amount for 2013/14).
http://www.legislation.gov.uk/uksi/2013/662/made

Ainsley1

Thanks for that 'heads up' all.
I'll study the links when I am not tired over the weekend. Off to bed now! zzzzzzz

Ainsley1

Thanks all. At last I have now read the links (and all the links in the links!) and I think I understand!

Between us we now have enough info to make a decision and it seems unlikely that he would sell enough to incur CGT as he also can sell other things in an ISA to make up care costs; and then do the same in future years...for a while!