Andy Zanelli, head of technical consultancy at AXA Wealth, explains how capital gains tax applies to your clients' investment portfolios.
Back in April 2008, capital gains tax (CGT) was reformed to simplify the process of calculating the liability. There is no longer a requirement to calculate indexation allowance or taper relief.
There is also no need to add the taxable gain to income to establish whether basic and/or higher rate income tax would be paid.
To make up for the loss of these allowances/reliefs, there would be just one reduced rate of tax of 18%.
However, in June 2010 it was announced that the rate of tax would be 28% on those taxable gains within the higher rate tax band.
How CGT applies to client portfolios
Here’s an example to show this in practice:
If a higher rate taxpayer purchased an asset for £50,000 and sold it this tax year for £70,600, then (assuming no other gains) the client has a total gain of £20,600.
After allowing for the CGT annual exemption of £10,600, the client would have a taxable gain of £10,000 which, taxed at 28%, gives rise to a CGT liability of £2,800.
Unfortunately, in reality, the calculation of capital gains tax is not that simple and other issues need to be taken into account.
First, certain costs incurred in the purchase and sale of an asset can be deducted from the gain for CGT purposes. For an investment portfolio, these costs can include dealing charges, stamp duty reserve tax, panel of takeovers and mergers levy, and potentially a dilution levy which is charged by fund managers to offset any effect on the price of the fund that a trade may cause.
The impact of dividend payments on the calculation of CGT should also be considered. For example, with unit trusts, it should be borne in mind that for ‘income’ units the net dividend is paid to the client, whereas for ‘accumulation’ units the net dividend payment is automatically reinvested into the fund.
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