Many people are keen to know how to avoid capital gains tax (CGT) on UK investments. The current rate of CGT on shares is either 10% or 20%, depending on your level of taxable income, which is actually fairly low by historical standards.
However, there is always the possibility that CGT rates will move higher at some point, so it makes sense to make sure your portfolio doesn’t have a large amount of unrealised gains that could become liable to CGT when you want to sell them in future.
Let’s look at a few ways to avoid capital gains taxes on shares and one strategy you may want to avoid.
Accounts for avoiding capital gains tax on shares
Both methods are very popular and have their pros and cons. Put simply, ISAs tend to be more flexible while you can generally invest larger amounts into a SIPP.
There are also some specialist investment schemes called venture capital trusts (VCT) and Enterprise Investment Schemes (EIS) that allow you to avoid or defer capital gains tax, but they are subject to a number of restrictions and only offer a very narrow field of potential investments.
Spread betting is risky
An increasingly popular way is to use spread betting. This is considered akin to gambling by HMRC and so no capital gains tax is levied on any profits made, unless it becomes your main source of income in which case it is then regarded as a trade and therefore liable to income tax.
However, spread betting can be extremely risky as it often involves the use of borrowing and you can become very exposed to small price moves. Most people that spread bet tend to lose money overall.
When thinking about how to avoid capital gains tax on UK shares, you might want to consider alternative methods.
Please bear in mind that taxation is a complex and nuanced area, so if you are in any doubt about your personal tax situation you may require professional advice, especially where larger sums are involved.
3 ways to avoid capital gains tax on shares in the UK
Here are three methods for avoiding capital gains tax on shares:
1. Shared ownership
Everyone has an annual CGT allowance, which is currently £12,300 for the 2022/23 tax year. Once the tax year ends, you get a new allowance and any unused allowance from the previous year disappears. Therefore, it can make sense to use as much of your CGT annual allowance each tax year, to ensure it’s not wasted.
Less well-known is that it may make sense, purely from a tax point of view, to jointly own an investment with another person.
This is most commonly done with a spouse or partner, but it doesn’t have to be. It could be anyone. In this way all gains and losses are automatically assumed to be due 50% to each of the joint holders.
Even where you wish to sell and the shares are already boasting a large taxable gain, but only one holder exists, it’s possible to use this method, particularly if you are married.
Although gifting assets is generally treated as a disposal for CGT purposes, exactly as though it was a sale at market value, with spouses, gifts are made at cost. In such a transfer, contrasting with general gifts of assets to other people, there is no gain or loss.
This means that solely-owned shares showing taxable gains that you wish to sell can first be put into joint names with your husband or wife, thereby effectively gifting half to that spouse at cost.
If you then sell the now jointly-owned holding, there are two potential benefits. Firstly the gain is split into two, and secondly two CGT annual exemptions are available, each against half the gain.
Variations on this method of how to avoid capital gains tax on UK shares include considering the marginal income tax situations of the spouses or other joint owners.
Since CGT is calculated by reference to total income in the tax year, where one owner is in a much higher tax bracket than the other, then it could pay to split the holdings to be sold in such a way as to optimise the CGT due, putting more or all of it on the lower marginally rated taxpayer.
This works with spouses because of the ability to transfer at cost, so that the holdings would be unequal, the exact inequality desired to be decided once the potential gain is known.
It might not work with unmarried joint holders, because any shift in the holding would cause a disposal, so you would need to examine this carefully before proceeding.
2. Sale and repurchase
Another method of avoiding capital gains tax on shares is sale and repurchase.
Here the idea is to realise a gain or loss on some shares by selling and perhaps making use of your CGT allowance for that year, while retaining ongoing ownership, where you wish to do so.
You do this by raising the base cost of the shares by utilising the annual CGT exemption in order to mitigate the capital gain on ultimate disposal, or possibly to create a loss to set off against other realised gains in the year.
This process used to be called bed & breakfasting and up until 1998 it was possible to use this method to sell a share and then repurchase it the next day, with hopefully only a small risk of the market going against you.
The 30-day rule introduced in 1998 ended this practice of how to avoid capital gains tax on UK shares.
Now, over 30 days has to elapse between the sale and purchase in order for it to count as a disposal for CGT purposes. Otherwise, you’re treated as though you never sold the shares in the first place.
Selling shares and buying them back 30 days later is less desirable since the shares could move significantly against you while you’re waiting.
Not surprisingly, techniques evolved to get around this rule change.
You can sell some shares and then repurchase them straight away with an ISA or SIPP. This is sometimes referred to as bed & ISA and bed & SIPP. This is simple to do but there are limits on how much you can put into an ISA and SIPP each year, so this method may not be available if you have already used your allowances for these products.
Another method, if you own the shares solely, is that you could sell them in the market (creating the gain), and your spouse can simultaneously repurchase them in the market to avoid any price movement. Your spouse can then transfer the shares back to you (if that’s desirable) which can be done in effect at their repurchase price.
In this instance, neither of you make a gain or loss plus you wind up still owning the shares as before.
This method of avoiding capital gains tax on shares can be done with an unmarried partner or any other person but with a slight additional problem. After the simultaneous repurchase in the market, the person, upon transferring back to the original holder, has to do so at market value because of the gifts rule.
That’s no problem if the market price is roughly the same, but if it has moved substantially, then the second person will create a gain or loss on themselves upon transferring back to the original holder.
One final but very important point on the methods that rely on a spouse or other party. The suggestions here are purely from a tax mitigation point of view. However, there may well be personal considerations that have priority over tax matters before entering into any such arrangements.
3. Different, but similar sale and repurchase
This method of avoiding capital gains tax on shares requires only one person, and works best with certain types of investment. The identification rules for matching sales and purchases of shares refer to those of the same class, which means in practice the identical shares.
However, there are many types of investment that are nearly identical yet are deemed to be different classes for CGT purposes.
A good example is an index tracker. One tracker, for CGT purposes, is not the same as another from a different fund manager, even though technically they may be pretty similar.
Therefore, if you are showing gains on one tracker, and wish to utilise your annual CGT exemption, you could sell enough to use your annual allowance and then use the proceeds to invest in a different tracker with similar specification.
You end up owning a similar investment, but at the current market price, in consequence raising the base cost and reducing any future CGT. You would do this each tax year when gains exist, continually uprating the cost.
The same principle would apply to any two investments that are closely correlated, yet not the same for CGT identification purposes. This is most likely to be the case with open-ended funds or investment trusts as it would be hard to find individual shares that are so closely correlated.
Currently, there are no time limits in the UK relating to how long you hold an investment for and what rate of capital gains tax you pay.
Generally, yes. You may have to pay CGT on shares held in an ordinary trading account although you do get an annual exemption (currently £12,300 for the 2022/23 tax year). However, there are various methods of how to avoid capital gains tax on UK shares, most notably by holding your investments in an ISA or SIPP.
The 30-day rule was introduced in 1998 to stop people selling a share, therefore realising a capital gain, and then repurchasing the same share shortly afterwards (a practice known as bed and breakfasting). In short, if you repurchase a share within 30 days of selling it, then you are deemed not to have disposed of it for capital gains tax purposes and your cost remains at the same level as your original purchase.
Capital gains tax is calculated on your net proceeds (so the sale value realised less any trading commission) less your net cost (so the purchase cost paid plus any stamp duty or trading commission). Note that if you are only selling part of a position and you made multiple purchases of a share, then there are share matching rules that dictate how your purchase cost should be allocated.