Tax year end and… moon landings?
A quick quiz
On July 20, 1969 the Apollo 11 lunar module Eagle landed on the moon’s surface. For the first time in human history, a man is about to step onto the surface of the moon… Sorry, you don’t get any points for knowing that was Neil Armstrong. Although, you might get a point for knowing the pilot of the landing module was Buzz Aldrin. But did you know that there was one other member of the Apollo 11 crew?
One man stayed aboard the Apollo 11 command module Columbia, while the other two took the first steps on the moon. The third crew member remained alone, while he orbited around the dark side of the moon, losing all contact with mission control for 48 minutes at a time in what was not hugely different from a baked bean tin, full of a few calculators. He, to this day, is one of the few people to have been between every human being and the infinity of the universe. He then cycled back around and picked-up Buzz and Neil, then the three went home, landing safely back again on Earth on July 24.
So, what’s the relevance of this pub quiz come history lesson, especially in the context of tax year end?
Well, just like tax year end, there are two allowances everyone remembers, and one most people typically forget. ISA and pension allowances are the most remembered, but the third, your Capital Gains Tax (CGT) allowance, is potentially even more powerful and important than those that everyone remembers.
Before going any further, let’s recap what CGT is and the important figures:
- It’s important to remember that CGT is a tax on profit. No gains on an investment, no tax to pay – although losses can be carried forward indefinitely to offset against future gains.
- In the tax year 21/22, the UK government gives you a CGT allowance of £12,300 – that means you can make £12,300 of profit before you’re liable to pay any tax, this is before any losses from previous years are applied. If you have a joint account with your spouse, then the allowance is doubled.
- CGT rates are actually very generous here in the UK – 10% as a basic rate income taxpayer and just 20% for higher rate taxpayers (it’s more on property, but that’s for another article). Because CGT is a tax on profit, you can actually release much more than this figure from your assets before tax is liable. For example, should you have a portfolio in which you initially invested £100,000, if in one year it goes up 10%, its value is now £110,000. If you sold your entire portfolio, you would realise a gain (profit) of £10,000, which is well within your allowance of £12,300, meaning there is zero tax to pay on your gains. However, you’ve actually now got £110,000 in your bank account, not just the profit of £10,000.
With so much going for it, why does everyone forget about it?
In my experience, there are two primary reasons as to why CGT is often overlooked. The first being, when people retire and they stop working, their regular income stops, and they think they need to replace that lost income, with other income. This is not the case and leads to inefficient tax and longevity outcomes. Your only goal when you retire, is to replace your monthly amount in your bank account from employment with a monthly amount in your bank account from your portfolio. The best and most efficient way to do this, is to utilise every allowance available to you, which includes your CGT allowance.
The second reason is that most investment managers will use your CGT allowance up each year in the day-to-day running of your portfolio, meaning you can’t use it when you need it. At 7IM, we think this is inefficient and have another solution, called unitisation. This method means that your CGT allowance is always there waiting for you when you need it, and not when we do. Of course, it is always important to seek financial advice to help decide what is most appropriate for you and your circumstances. Unitisation can prove to be beneficial for many people, so please do get in contact if you’re interested in learning more about the solution.
All in all, an allowance not to be forgotten, much like Michael Collins (10 points if you knew his name before reading this article).
Please note that this article is intended for educational purposes only and should not be taken as investment advice. You must be aware that the value of your investments may go up and down and you could receive back less than you originally invested. Tax rules are subject to change and taxation will vary depending on individual circumstances. Please consult a financial adviser before making any investment decisions.