As a general rule when an individual makes a gain in a tax year he or she will offset losses made in the year and brought forward losses from the gain. Also, brought forward losses can be restricted to the level of the annual exemption which is currently £12,300.
There is now widespread speculation that low rates of capital gains tax will not be here for much longer. The current top rate of capital gains tax is 20% while the top rate of income tax is 45%. Rishi Sunak has already commissioned a review into this tax which will be completed before the Autumn Budget. Some sort of hike in rates must therefore be odds on – before we even mention the C word!
A possible way forward would be for Sunak to tax capital gains at dividend rates. Currently, any annual dividend income from shares above £2,000 is taxed at 7.5 per cent, 32.5 per cent or 38.1 per cent – dependent on whether an investor is a basic, higher or additional rate taxpayer. The £12,300 annual exemption may also be at risk – which was something that the Labour Party included in their last election manifesto.
This all made me think about whether we should automatically be using brought forward capital losses now, given that they could have a much greater value in the future.
It may make sense (if possible) for a tax payer to pay tax on gains that they make now and carry forward losses in the hope that they can be used to relieve gains that would be subject to a much higher tax rate in the future. Unfortunately this is not possible at an individual level because the only way that brought forward losses can be restricted is so as to protect the annual exemption (see above). However married couples and civil partners may effectively be able to preserve their losses by making use of capital gains tax free inter-spouse transfers.
John has £200,000 of brought forward capital losses and is about to make a gain of £300,000 on a share sale. He also has a large portfolio of shares with ‘pregnant gains’ which he anticipates realising over the next few years. Instead of making the gain himself, John gifts the shares to his wife Jane to allow her to make the gain and pay £60,000 of capital gains tax at 20% (ignoring annual exemption). In November the capital gains tax rate is increased to 40% and John sees the value of his losses double to £80,000 (40% of £200,000) and he has the comfort of knowing that he can make a further £200,000 of gains before he is affected by the rate hike.
Of course great care needs to be taken with this kind of planning because ‘a bird in hand is worth two in the bush’. John would feel fairly foolish if all his gains evaporated and his wife was left with a £60,000 capital gains tax bill which could largely have been mitigated. However the main point stands which is that capital losses will probably become much more valuable in the future.
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