Whilst some investors may be lucky enough to ride out the storm, others may be forced to sell realising capital losses in the process. However, all may not be completely lost.
Reducing capital gains
Capital losses of one tax year can be used to reduce capital gains of the same tax year (hence lowering the overall capital gains tax bill; since 6th April 2008 the rate of capital gains tax is 18%) and, if such losses exceed the capital gains, the unused surplus can be carried forward for offset against capital gains of future tax years.
Example 1
Johnny Smith has investments in three listed companies ABC Plc, XYZ Plc and LMN Plc. The original cost of the shares were £6,000, £8,000 and £20,000 respectively. The shares are now worth £15,600, £6,400 and £12,000 respectively.
Unfortunately, Johnny is forced to sell all three investments in the tax year 2008/09.
He thus makes a capital gain of £9,600 (on ABC Plc) and capital losses of £1,600 (on XYZ Plc) and £8,000 (on LMN Plc). Offsetting the losses against the gain produces an overall net capital gain of nil. No capital gains tax liability thus arises.
Whilst Johnny in Example 1 above has no capital gains tax liability for 2008/09 he has unfortunately “wasted” his annual exemption of £9,600 (for 2008/09). The annual exemption is the amount of capital gains which an individual can make in a tax year without paying capital gains tax.
It would have been to his advantage, if feasible, to simply sell the ABC Plc shares in 2008/09 the capital gain of which (i.e. £9,600) would not be taxed as it falls within the £9,600 exemption, leaving the shares in XYZ Plc and LMN Plc to be sold in 2009/10, all the losses in respect of which could then be used in 2009/10. Sales on 5th April 2009 and 6th April 2010 would achieve this objective.
Inter-spouse transfers
It is important to remember that each individual is entitled to the above annual exemption including husband and wife. There may, therefore, be instances where transfers between the spouses would mitigate aggregate capital gains tax liabilities.
Example 2
Johnny Smith has held investments in three listed companies ABC Plc, XYZ Plc and LMN Plc. The original cost of the shares were £6,000, £8,000 and £20,000 respectively. The shares are now worth £15,600, £6,400 and £12,000 respectively.
Johnny’s wife, Sandra, also owns shares in ABC Plc which had originally cost her £12,000 and are now worth £31,200.
It would make sense for Johnny to transfer his shares in XYZ Plc and LMN Plc to Sandra for her to then sell.
Johnny would sell his shares in ABC Plc making a capital gain of £9,600 which would be reduced to nil after offsetting his annual exemption.
Sandra would sell her ABC Plc shares producing a capital gain of £19,200 but she would also sell the shares transferred to her by Johnny producing capital losses of £1,600 and £8,000 in respect of XYZ Plc and LMN Plc respectively i.e. showing a net capital gain of £9,600 against which she would then offset her own annual exemption producing a net capital gain of nil.
The important point to note is that on inter-spouse transfers the transferee spouse acquires the transferor spouse’s investments at the original cost to the transferor spouse (i.e. what is commonly referred to as “no gain/no loss” transfer).
Remember…
· Time sales carefully so as not to waste the annual exemption.
· Consider whether effecting inter-spouse transfers may be capital gains tax efficient.
Malcolm Finney
