Working out CGT on Investments

martindias

Ohhhh - up against the clock again. There's probably a simple answer but nothing about Capital Gains Tax seems simple. Having sold my house a few years ago, to look after my aging Mum, I put the proceeds into investment funds. I am now retired, and in drawdown on a small pension. I now need to sell some those investments to finance building work on my house.

I am going through the tortuous process of trying to work out the average each share/unit has cost (the section 104 cost i believe). Well I have now got that far. I haven't yet clicked the sell button. Once i have sold a portion of my investments i have calculated there will be CGT amount of £63k of which £11.7k covered by the CGT tax free allowance.

My pension income at the moment is only about £4000 per annum so way below by personal income tax allowance. I am still largely living off my Tax Free Lump Sum acquired when my drawn-down began. In this financial year my pension plus the amount of Capital gains I'll plan to realise will put my income at £56k

SOOOOO my question is; once i realise these gains am i in the basic tax bracket, consequently only paying CGT at 10%, or now in the higher tax bracket in which I pay 20%? :beer:

inflationbuster

Try http://cgtcalculator.com/

I use it for my tax return.

martindias

clicking on that link just dragged me to downloading an add-on - so a bit dubious - but thanks for your quick response. I just need to know does income from realised Capital Gain push you into a higher rate tax bracket - if it does I'll aim to sell less so i stay within the 10% band, basic rate tax payer.

londoninvestor

martindias wrote: »

I just need to know does income from realised Capital Gain push you into a higher rate tax bracket - if it does I'll aim to sell less so i stay within the 10% band, basic rate tax payer.

Based on what you asked in your original post...

Short answer: yes

Slightly longer answer: read the "if you pay basic rate Income Tax" section here.*

To be precise, when you ask "does income from realised Capital Gains push you into a higher tax bracket", note that it doesn't affect your income tax bracket, and consequently it won't affect things like Child Benefit tax charge, or Personal Savings Allowance.

* It should really be called "if you don't pay Income Tax, or pay it at basic rate..."

badger09

Not an answer to your question:o but do you need to raise all the money before 6th April?

If not, why not sell in 2 tranches, half in this tax year and half after 6th April to benefit from 2 x CGT exemptions?

bowlhead99

Off the top of my head:
Your income is below your personal allowance so your income uses up £0 of your £34,500 basic rate band. None of the income is using up that band.

This means that when you get capital gains, the first £34500 of them can be said to fall into the 'basic rate band' and be taxed at the lower CGT rate (10% = £3450 CGT bill)

The rest of the capital gains don't fall into the basic rate band, so are taxable at higher CGT rate (20%)

How much are the 'rest of the capital gains'?

Well, you reckon you'll have total gains of £63k, assuming prices don't move much before you sell. The first £11.7k of that is exempt, and the portion that falls into the basic rate band is £34.5k, so the rest (which is not exempt and doesn't fit into the basic rate band) is 63.0-11.7-34.5 = £16.8k. At higher rate CGT of 20%, that's £3360 of CGT to add to the £3450 of CGT you had earlier.

In total the CGT is a little under £7k.

If you arranged your sales so that you sold fewer investments this week and deferred the sales to next week, you could save a lot of that tax. For example, working n round thousands, if you made £17k less gain this year, nothing would fall into higher rate CGT, and you would save that high rate CGT bill of £3360.

Then you could do the rest of the sales and make £17k of profits next week instead, of which the first £12k is exempt (new exempt amount for 2019/20) and the last £5k hopefully falls into your basic rate band for 2019/20 and only costs £500 of 10% CGT. So replacing £3360 of tax bill with a more pleasant £500 tax bill instead.

martindias

Thanks that is very helpful. I am spreading the sale of assets over this and next financial years and have scaled down my sales this year to keep me within the 10% tax band and keep me in the Basic Rate tax payer bracket. The total amount i raise may be less than I need for the building work but if that happens I'll utilise some of my ISA savings, which I really wanted to leave untouched as i use these as a tax efficient way of topping up my pension. Once the building work is finished I hope to have a one bedroom apartment crafted out of the house to rent for a small tax free income. Thanks for all your quick advice - my sale is now pending execution.

martindias

badger09 wrote: »

Not an answer to your question:o but do you need to raise all the money before 6th April?

If not, why not sell in 2 tranches, half in this tax year and half after 6th April to benefit from 2 x CGT exemptions?

Yep I have done that - another sell-off timed for 2 weeks time and both keeping me under the higher tax paying bracket. :T

martindias

Thanks for all your help - Martin Lewis Money Saving Expert Forum members - or are you Angels?