Authorised investment funds for individual investors: planning ideas

The rates for CGT in 2022/23 applying to individual AIF investors are:

• 10% for individuals where total taxable gains and income are less than the upper limit of the basic rate band (£37,700+£12,570 = £50,270)

• 20% for individuals in respect of gains (or any part of gains) above that limit.

Spring Budget 2021 stated that the £12,570 personal allowance and £37,700 basic rate limit will remain in place up to, and including 2025/26. The higher rate threshold will therefore be £50,270 for these years.

The annual exempt amount (AEA) for individuals (including children) for 2022/23 is £12,300. No claim is required for the annual exemption. Any unused exemption may not be carried forward.

Spring Budget 2021 stated that the £12,300 annual exempt amount will be maintained at that level up to and including 2025/26.

The Scottish and Welsh rates of income tax applies to non-savings and non-dividend income – the personal allowance and thresholds and taxes on savings and dividends remain a UK ‘reserved’ matter.

CGT has not been devolved (nor NIC, IHT or corporation tax).

Chargeable gains (or allowable losses) accrue on the disposal of assets. The word 'disposal' is not expressly defined in the Taxation of Chargeable Gains Act (TCGA) 1992, so must be given its natural meaning. Sales and gifts are both examples of natural disposals. Gifts to children, for example, may therefore give rise to a CGT charge. Similarly, gifts to trustees can create a CGT liability although 'hold over relief' may be available (S260 TCGA 1992) in certain situations. This is a complex area requiring professional advice. Note however that certain disposals are no gain / no loss disposals, where the asset is treated as passing from the transferor to the transferee at a value which results in neither a gain nor a loss accruing to the transferor. For example:

The result is that the recipient will inherit the asset's CGT 'history'.

The exemption for inter-spouse transfers can be used to ensure that gains are realised by the partner with the lower marginal CGT rate.

Neither indexation allowance nor taper relief apply to disposals of assets by individuals on or after 6 April 2008.

In broad terms a 'capital gain' is the amount by which the disposal value of a chargeable asset exceeds its acquisition value. Certain incidental costs (e.g. dealing fees, stamp duty reserve tax) are also deductible.

Where a chargeable asset is gifted (ie not a bargain at arm's length), the person making the gift is treated as disposing of the asset at market value, unless it is a no gain / no loss transfer.

Matching disposals against acquisitions on the same day and against acquisitions within the 30 days following the disposal are anti-avoidance rules to counter the practice of selling and buying back shares shortly afterwards simply to realise a gain, and increase the base cost for future disposals (or simply to realise an allowable loss). This works as follows:

Example

Alison has 9,500 units in her Section 104 holding

• 30 August 2022 – sells 4,000 units
• 12 Sept 2022 – purchases 500 units

Her disposal of 4,000 units is identified as follows:

• 500 against units purchased on 12 Sept 2022 under the 'bed and breakfasting' rule.

3,500 against the shares in the Section 104 holding

Planning

The 'bed & breakfasting' anti-avoidance rules do not apply in the following situations:

• Repurchase after 30 days
• Repurchase of a non-identical fund
• Repurchase made by spouse

Repurchase within an ISA or pension

An individual is assessable to CGT on his or her total chargeable gains for the year of assessment reduced by:

• allowable losses
• the AEA.

The treatment of losses depends on whether they are:

• losses of the same year of assessment as the gains
• losses of earlier years of assessment.

The procedure is as follows:

1. Deduct any allowable losses accruing in the year of assessment from gains made in that same year – – even if the net chargeable gains fall below the AEA (losses which cannot be set against gains of the same year of assessment are carried forward and set against gains which arise in the future).

2. If the net gains under 1. above are more than the AEA (£12,300) and there are unused losses brought forward from a previous tax year then deduct those losses, but just enough to reduce the net gains to the AEA limit.

3. If there are still unused losses from a previous year after they have reduced gains to the AEA, they can be carried forward to future years.

Planning aspects with losses

There is no point – from a tax perspective – in crystallising a loss when net gains in that same year of assessment are within the AEA.

Losses crystallised in a year of assessment in which there are no gains will allow the full amount to be carried forward.

If one spouse or civil partner has realised gains in excess of the AEA and the other spouse has uncrystallised losses, consider an exempt inter-spouse transfer followed by a disposal.

Losses in the year of death

As noted above, capital losses that can’t be used in the year of assessment in which they arise may normally only be carried forward. There is an exception, however. If an individual incurs capital losses in the year in which he or she dies, those losses must first be set against gains of the same year (even if this reduces the net figure below the AEA). Any surplus can be set against gains of the three preceding years – allowed against the gains of a later year before gains of an earlier year.