Why You Should Harvest Your Capital Gains Even If You Won’t Go Over the CGT Allowance

The time to act is now! Save yourself money by harvesting before the end of the race year (5th April)

The spectre of a lower CGT allowance might mean that shares that you hold in a General Investment Account (GIA) are subject to a 10% tax rate if you are a basic rate tax payer and 20% if you are above that.

Read the Gov.uk page on capital gains tax to better understand the lie of the land.

The lower allowance of £6,000 next tax year and £3,000 beyond that could mean that your gains become taxable. And if you are in England and manage your income to come in below £50,000 in taxable earnings (to retain child benefit), an unexpected capital gain of £10,000 (above the allowance) could see you pay 20% tax (£2,000) on that and lose your child benefit (£1,885 for the Master and Little Lady).

That’s a marginal tax burden of 39% – and it gets worse the more kids you have!

Different tax rules apply in Scotland, where the 41% higher rate comes in after £43,662 (and not £50,270) – making this post not just theoretical but personally important!

So, you have a few weeks before the 5th of April at the end of the tax year. Use that time to check your portfolio and tidy it up. Sell some winners to make your way up to £12,300 – even if you don’t have that much gained, it might come in handy in future years. It’s easy enough to swap one ETF for another (although make sure you don’t say swap from VWRL to VWRP – for example).

Likewise, if you have some losers – investments sitting with capital losses – you might want to wait until the next tax year to sell them. It’s a question of balancing your books and harvesting your gains (and losses) to put yourself in the best position. Unless you weren’t aware, the government needs money and if you are not too careful, they’ll take yours!

I’ve decided to sell investments that we hold that could be taxed in the future for a £700 tax bill (and which pay a healthy dividend which has its own tax headache of around £150 a year). The money will be reinvested into a lower paying dividend producing ETF – buy and hold type – which will save us £700 this year and maybe £100 a year going forward.

I might purchase the investment again in my ISA once the new tax year begins and shifting money from a GIA to an ISA is a sensible thing to do anyway. ISAs are great for long term saving/investing and whilst I did think that Mr. Hunt was coming for them [LINK], they might disappear at some point.

Sell to SIPP

Another choice that you could make now is to sell your investments, avoid the CGT on the gains, and invest the money then into your SIPP. For a basic tax payer, you could save 10% on CGT, get 25% top-up on your SIPP from the government, take the money out with a 25% tax free lump sum and pay 20% on the rest.

The numbers are compelling. Say it’s £10,000 profit – with CGT you’d get £9,000 after tax (next tax year if you do nothing now). Put that £10,000 into your SIPP to make £12,500 and you can take out £3,125 tax free and £7,500 after tax giving you £10,625 in total. That’s an 18% bump compared to being stung by CGT.

Selling your investments might be a good idea if you want to get out of one investment to get into one with lower fees. Even a 0.10% reduction in OCF could mean £100 a year on a £100,000 portfolio. Or maybe your GIA/ISA/SIPP provider isn’t right for you – can you do better elsewhere? Maybe you could get a nice sign-up bonus for opening a new account somewhere?

If I’m telling you how to suck eggs, sorry. I like this aspect of personal finances, and NOW is the time to do it since the window of operation for private investors is narrowing.

Does the importance of filling your ISAs up need reiterated? I should probably add that you should always tell the truth on your self-assessment because if you are caught, you’ll be in trouble and if you aren’t caught (yet) you’ll get bad sleep.

To sum it all up. The recent budget had some tweaks. Pensions are good say the government, ISAs are safe, other investments are ripe for the tax man to reap. We’ve all got the time now to do something about it and get our finances on an even keel.

Good luck, GFF.

Advertisement