There were rumours that CGT rates were going to be increased at the Budget. These eventually proved to be incorrect, but there are still commentators that feel it is only a matter of time before changes are made with the huge COVID-19 related borrowing to finance for years to come.
As a result, many individuals may be contemplating selling assets to lock in the existing rates. Some may have already done this ahead of 27 October without seeking advice. As a result, a refresher on the way relief for capital losses operates is timely.
The first thing to note is that capital losses cannot be carried back to earlier tax years, unless they relate to earn out rights or are realised in the year the taxpayer dies. So, if there were considerable gains in 2020/21, triggering losses in 2021/22 won’t reduce the CGT payable.
Instead, capital losses are first offset against gains arising in the same tax year. This is automatic – there is no scope to restrict the amount of loss used to preserve the annual exempt amount, which is deducted from net gains after losses are offset.
If there are no gains, or if there are excess losses that can’t be relieved in the same year, the amount carries forward to offset gains in future years. However, the annual exemption is then applied first, so the losses will only be used if there are gains that exceed this (currently £12,300). There are a few planning points that result from these rules.
In terms of maximising tax relief, it will only be worth selling assets standing at a loss in the same year as there are capital gains if those gains exceed the annual exempt amount. If an individual has already sold assets at a loss, and the in-year gains are not sufficient to exceed £12,300, they could look to realise further gains ahead of 5 April. Alternatively, they can wait until the next tax year to realise any gains so the loss is secured to carry forward.
Example. Alan sold some shares at a loss of £8,000 ahead of the Autumn Budget. Earlier in the year he had realised a £10,000 on cryptocurrency. As things stand, the loss will reduce the gains to £2,000, which will be covered by the annual exemption. This is inefficient, as offsetting the loss won’t save any tax. Alan could look to trigger a further £10,300 of gains. If he manages to do this the loss would reduce the gain to the level of the annual exemption. There would be no CGT bill in either case, but Alan will have additional tax-free money in his bank account.
Where there are losses that carry forward, the planning changes slightly. There is no time limit on capital losses, so they do not "run out", though as time goes on there can be a risk of forgetting about them, meaning they go unutilised. The main planning point in these circumstances is to remember that gains of up to the annual exemption can be made before the loss starts to offset them. Many individuals will have a managed portfolio set up to just use up the annual exemption (which is wasted if it isn’t used each year). These individuals can look to realise additional gains with no CGT charge due to the losses. The gains can then be reinvested into the portfolio, or otherwise used as the individual sees fit.