Numpty’s guide to CGT

SimonSeys

Apologies to everyone who thought this would be a guide.  I’m looking for advice, not providing it!

A mate of mine (honest!) is in the fortunate position of making out pension contributions (DB scheme) and S&S ISA (Vanguard).  Previously rpthey bought Government bonds which are CGT exempt, but they are now thinking about buying an unshielded Vanguard ETF. 

How does CGT work?  I understand there is a £3k / year allowance.  But can they after (say) ten years bank à £30k gain as being tax free?   Or do they need to sell and rebuy the ETF each year to crystallise the £3k gain and offset it against the CGT allowance?

si

FrugaiMacDugal

The £3k/year doesn't carry forward any unused years.

What he would need to do after 10 years, would be to sell enough EFTs each year to realise a £3k gain.

kimwp

There's rules around selling and re-buying every year, there needs to be a gap (30days I think, but not sure) to avoid it being as though they were continuously held through that period for Cgt purposes.

vacheron

SimonSeys said:

How does CGT work?  I understand there is a £3k / year allowance.  But can they after (say) ten years bank à £30k gain as being tax free?   Or do they need to sell and rebuy the ETF each year to crystallise the £3k gain and offset it against the CGT allowance?

As above, there is no carry forward on CGT. Use it or lose it. 

Your friend should also be advised that if they buy back the same shares (or fund) within 30 days of selling them the disposal for CGT purposes will be deemed to have never to have taken place under the "Bed and Breakfasting" rules.

They would therefore need to wait 30 days before re-purchasing to realise the initial capital gain.... or buy an "almost but not quite" identical fund to the one the sold, or they can sell the fund have their spouse or partner buy it back in their name... the list goes on!

wmb194

kimwp said:

There's rules around selling and re-buying every year, there needs to be a gap (30days I think, but not sure) to avoid it being as though they were continuously held through that period for Cgt purposes.

Yes, but that's for the same security. You could sell e.g., your MSCI world tracker Vanguard ETF and then immediately purchase a MSCI world tracker HSBC ETF and have no issues.

Notepad_Phil

Is your friend also aware of the tax complications that might come depending on what funds they buy? E.g not all Vanguard funds that you can buy in the UK are UK domiciled and some I believe come with "excess reportable income" that needs to be dealt with.

SimonSeys

Thanks all.  Really helpful.  

It really is a friend of mine - I’ve suggested they get proper financial advice but they want to know the basics beforehand.  

So switching between (say) Vanguard LifeStrategy 100 and LifeStrategy 80 every year would count as realising any gains, avoid bed and breakfasting, and therefore maximise use of the £3k allowance. [£6k if uses spouse’s allowance)

Thanks again,
Si

FrugaiMacDugal

He doesn;t have to switch.

Say VLS 100 increased £1 since he bought them, then he would only need to sell 3000 to realise £3000 (there may be dealing costs involved).