Crystallise capital gains to use up basic rate allowance to pay 10% CGT now or defer?

haveabreak

Hello

On a investment portfolio of shares, it makes sense to crystallise enough capital gains each year so that the annual exempt allowance for CGT is used up (e.g. swapping like for like investments such as ETFs).

My question was, using the same strategy, is it also good to crystallise capital gains up to the basic rate limit (thus taxed at 10% each year) or defer paying this tax for a later date albeit unknown future tax rate?

E.g  Lets say taxable income (less personal allowance) is £15,000 per year. This tax year the basic rate is £37,700. Remaining basic rate allowance is £22,700. Annual exempt amount for CGT is £12,300. So technically you have £35,000 of gains that can be crystallised in the year to pay tax at the lower basic rate of 10% (any gains above £35k will be taxed at 20%)

I think the best course of action would depend on what the outlook is for future CGT rates and also what is intended with the assets in the future, e.g pass on as inheritance etc. I would interested in hearing the views and options.

Thanks.

RacingDriver

It would depend on your future plans, for example if you have a GIA which you are not adding to and you are using Bed-and-ISA each year to reduce it (assuming not using ISA allowance elsewhere), then why pay 10% tax to withdraw over the CGT limit?

But if you needed to withdraw an amount over the basic rate in a few years time maybe you would consider withdrawing over a few years to pay 10% rather than in one go paying 20% but then what to do with the cash in the meantime?

If you intent to pass the assets on as an inheritance then why pay CGT when this is uplifted on death (and inheritance tax paid instead), maybe worth paying CGT if you then gave the money away during your lifetime though.

dales1

OP, I agree with you, and I do exactly this in my own circumstances. I pay CGT right up to the top of the 10% tax band.

(Others' circumstances may differ ! )

[NB RacingDriver: to crystallise CGT you do not need to withdraw cash; just switch investments to other ones, so CGT free].

Athough CGT is already a vicious tax on purely inflationary gains, there are factions trying to have the tax rate increased, so take precautions.

If your GIA portfolio is large enough that it might grow in value by more than the c.£12k CGT allowance pa (on average) you are building up tax exposure if you ever need the money.

For myself, I see a future need for CGT-free money, eg to pay for annual S&S ISA subs, an early inheritance, a newer car, house repairs, who knows.

So, I need to be utilising, not only the annual c.£12k CGT allowance, but also the 10% CGT tax rate for gains within the basic rate tax band (above which it is 20% tax) (before this opportunity is eroded by frozen tax bands and income increases).

I emphasise these italicised words - Use it or Lose it (ie the 10% CGT band).

Dales.