Capital gains tax and the basic rate limit

haveabreak

Hi there

I currently do not work. I have some rental income that goes just over my personal allowance. I also have gains from investments in shares/funds.

I make use of the capital gains allowance each year (£6k for 2023-24 tax year). I bed and isa, or i sell and buy etfs/funds which are similar to crystallise gains.

Sometimes I crystallise gains over the capital gains allowance limit up to my basic rate limit. This limit would approx be £30k on top of the £6k capital gains allowance this tax year. The reasoning is this £30k of gains can be taxed at 10% now rather than taxed at a (potentially) higher rate in the future.

My question is this (assuming investment gains make it possible and the capital gains allowance for the tax year gets used up): Is the optimal approach to crystallise gains on the basic rate limit (i.e. £30k this year) every year and pay 10% now, or not crystallise gains on the basic rate limit at all?

I understand the Buffett rule of delaying paying tax (as tax can earn return for you). But say you delay and in the future you want to dispose a hefty chunk and make for example £100k+ gains... then you would be taxed at higher rate (currently 20%) for a proportion of it. If you've already taxed some of it it earlier at 10% as per strategy above, then it would not fall on the higher rate limit.

It's all a bit speculative in my opinion but it would be good to hear your thoughts and if you think there is an optimal strategy.

EthicsGradient

As you say, there's an element of speculation about what future CGT rules and rates may be, and how likely you think it might be that you want a large amount of capital. If you've been turning over your portfolio regularly, paying 10% on some sales, then you would likely have some recent purchases sitting on not too much of a gain, compared with investments you've held for many years and consisting mostly of gains.

I'm in a somewhat similar position, but in my case I have some active funds and ITs that I don't feel are likely to outperform index trackers in the future. So I've compared the differences in annual charges between the fund and an index tracker to the CGT I'd pay if I sold some of them, and then sold those with the highest charge/CGT ratio, nearly to the higher rate threshold. So in the long term I see the benefit of lower charges.

dales1

Yes, the CGT annual allowance (0% tax) and the CGT basic rate band (10% tax) are both 'use it or lose it'.

So personally I have been using both of these for a few years (until my income outgrew the frozen basic rate band).

I don't think that the political outlook is benign for people with unharvested gains.

So if the 10% rate happens to rise in future, you may wish you had harvested some of those gains at 10%.

We cannot calculate which way is optimal, as we don't know future tax bands or rates.

So people have to make their own call - and I preferred to pay the 10% while I could.