The Knowledge: Avoiding capital gains tax foul-ups

Providing accurate planning advice to clients about capital gains tax (CGT) can be a problem area for firms. Karrie Tilburn ACSI and Abi Ostler ACSI of K A Watson Consultancy highlight five common pitfalls to avoid


Beware legislation changeThere have been a number of major legislative changes over the years which have each altered the rules and order in which sales are matched to purchases to apportion book costs. A common misconception is that simplification of legislation in 2008 means that you no longer need to consider historic matching rules. Watch out though!When calculating or checking brought forward costs on historic transactions, take care to ensure you identify the matching rules that were in force at the relevant time. For example, where assets have been acquired prior to 1998 you will need to identify the relevant pool and/or stand-alone acquisitions for each purchase in order to match sales against these in the correct order.By taking care you can ensure accurate reporting of gains and losses on disposal.

Spouse transfers

The ability to transfer shares to a spouse for no gain or loss provides a useful tool for tax planning to spread gains across both parties’ annual exemption. However, special care should be taken to ensure the identification rules do not thwart the end result. A transfer to a spouse is still classed as a disposal and this needs to be considered to ensure any subsequent transactions don’t fall foul of the 30-day matching rule.

Gifts to connected persons
Where a loss is incurred on a gift to a connected person, those losses can be offset only against future gains to the same person, they must not be offset with current year gains. Most systems used by firms cannot correctly identify where a loss has been incurred in these specific circumstances and therefore you need to monitor transfers to connected persons to prevent offsetting losses when it is not appropriate to do so.

Pay attention to the offshore fund regime
Qualifying offshore funds benefit from allowing gains to be charged to capital. However, a fund can be treated as qualifying only when reporting status is achieved for the entire period held.Therefore you need to have adequate controls in place to monitor any changes in reporting fund status. In addition, as income tax is chargeable on all profits, both actual and deemed distributions, the amount of the deemed distribution is an allowable deduction for CGT.Establishing the amounts of Excess Reportable Income and any associated equalisation for a fund can be difficult and time consuming, however it is essential to ensure correct adherence with HM Revenue & Customs (HMRC) taxation rules.

Consider annual exemptions and external client investments
One of the easiest ways to miscalculate CGT gains on a portfolio is with the misapplication of the Annual Exemption (AE).The AE for the 2015/16 tax year is £11,100 for individuals and £5,550 for Trusts (in most instances). Where a client has multiple internal accounts, possibly including a joint account, make sure that your records apply the AE only once per client and not to each account held. It is also imperative that you ask clients about any external tax considerations which you may need to factor into your year-end tax reporting.KA Watson Consultancy provides CGT administration and training services.

Pictured from left, Karrie Tilburn and Abi Ostler

Published: 03 Jul 2015
  • Wealth Management
  • Financial Planning
  • News
  • capital gains tax

No Comments

Sign in to leave a comment

Leave a comment

Further Information

  • Detailed guidance, including the complete Capital Gains Tax Manual, is available through the HMRC website