Capital gains tax annual exempt amount – use it or lose it

The tax systems contains a number of allowances which enable individuals to enjoy income and gains tax-free. One of these allowances is the annual exempt amount that applies for capital gains tax purposes. For 2021/22, it is set at £12,300. It will remain at this level for 2022/23.

Nature of the annual exempt amount

The annual exempt amount allows each individual to realise net gains of up to £12,300 in the 2021/22 tax year before any capital gains tax is payable. Spouses and civil partners each have their own annual exempt amount.

The annual exempt amount is applied to net gains – that is chargeable gains less allowable losses – for the tax year. Thus, while losses for the tax year must be set against gains for the tax year before applying the annual exempt amount, there is no requirement to use up losses brought forward before utilising the annual exempt amount.

If the annual exempt amount is not used in the tax year to which it relates, it is lost – unused amounts cannot be carried forward.

Tax planning opportunities

The 2021/22 tax year comes to an end on 5 April 2022. The final months of the tax year are a time when it is prudent to review your tax position and consider whether any action should be taken before the tax year comes to an end.

From a capital gains tax perspective, it is advisable to review disposals made so far in the tax year and the resulting net gains/losses, and also any planned disposals.

If the annual exemption has not been used in full, and a disposal is on the cards which may yield a chargeable gain, consideration could be given to realising the gain in the 2021/22 tax year. This will enable you to take advantage of the annual exempt amount for 2021/22, leaving the 2022/23 annual exempt amount available to shelter the first £12,300 of gains realised in that year.

On the other hand, if a disposal is planned before the end of the tax year that will realise a loss and, when set against gains for the tax year, will result in some or all of the annual exempt amount being wasted, consideration could be given to delaying the disposal until 2022/23. This will prevent wasting the 2021/22 annual exempt amount, and also leave the loss available to reduce any 2022/23 gains.

Spouses and civil partners each have their own annual exempt amount, and the ability of spouses and civil partners to transfer assets between them at a value that gives rise to neither a gain nor a loss opens further tax planning opportunities when it comes to ensuring that the 2021/22 annual exempt amount is not wasted. If one spouse/civil partner has used all of their annual exempt amount, but their partner’s remains available, transferring the assets (or a sufficient share to use up the available annual exempt amount) prior to sale will ensure that use is made of the available annual exempt amount. Likewise, if neither partner has used their annual exempt amount and the likely gain exceeds £12,300, transferring a share in the asset to their partner prior to sale will enable both annual exempt amounts to be used.

Example

Tom and Lucy are married. In 2021/22, Lucy sold some shares realising a gain of £13,000. This has used her annual exempt amount in full. Tom has made no disposals in the year.

Lucy plans to sell some more shares which she expects will realise a gain of £11,000. She was planning on waiting until after 5 April 2022 to make the disposal.

However, if she transfers the shares to Tom prior to sale, and if Tom sells them before 6 April 2022, the gain will fall in the 2021/22 tax year. Consequently, it will be sheltered by Tom’s annual exempt amount for 2021/22, ensuring that this is not wasted, while leaving Lucy’s annual amount for 2022/23 available to set against any other gains in that tax year.

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