Turning assets into income and avoiding capital gains tax
For most people, capital gains tax (CGT) becomes a concern only when they want to turn long-term investments into income, typically when they retire and want to start using their savings to top up their pension.
In this event many people can avoid CGT altogether by careful planning in terms of how the gains and tax are calculated.
First of all, remember your exemption, and remember that you get this every year. This is the key. In 2019/20 you can realise a gain of £12,000 tax free, so for a couple that is £24,000. For people seeking to supplement their income by use of capital, this is often all that they need.
Also, in most cases, people do not suddenly need to move large blocks of investment from stocks into cash. In your sixties you might want to increase your income, but you still want growth over the next 25 years to sustain you in retirement.
Ignoring for the time being that many of your assets will be in exempt areas (such as ISAs etc), let us examine the case of you having built up your savings in a unit trust called DOSH.
- You have amassed 100,000 units in DOSH, in joint names with your spouse
- We'll assume that you paid an average of £1 per unit
- Because it has done very well, the current unit price is £3.
So each unit you sell gives you a profit (gain) of £2.
- If you encashed in the whole investment you would make a gain of £200,000 and pay a very large tax bill
- However you simply want to top up your pension by £12,000 a year
- To do this you encash 4,000 units at £3 each to give proceeds of £12,000
- The gain is 4,000 x £2, i.e. £8,000
- The gain is split between you and your spouse and amounts to only £4,000 each, which is inside your annual exemption. There is no tax liability.
- Provided that you are conservative and fund growth exceeds withdrawals you can repeat this every year for as long as you wish.
Knowledge of such techniques and the importance of advance planning and investment placement is one of the areas in which we can help you.
This information is based on our understanding of current tax law and practice, which may change in the future. The way in which tax charges, reliefs and allowances are applied depends upon individual circumstances and may also be subject to change in the future. This document is solely for information purposes and nothing in this document is intended to constitute tax advice. You should take professional advice before making any tax planning decisions.