If you’ve sold an asset, say some cryptocurrency, for less than you paid for it you will have made a capital loss. The amount of tax relief you’ll get for this can vary. What steps can you take to maximise it?

CGT rates increasing?

The rumour is that the rates of capital gains tax (CGT) may rise in this year’s Autumn Budget (27 October 2021). The suggestion is that they’ll be aligned or linked to the income tax rates you pay. This has been the case more than once in the history of the tax and so the change wouldn’t be a surprise as the government needs to raise tax to cover the cost of the pandemic. Increased CGT rates will also affect the relief given for capital losses which makes loss planning important.

Timing is everything!

The saying that timing is everything is especially apt for capital losses . Timing determines what effect it has on your CGT bill, if any. To some extent if you can control when a capital loss arises you can affect the amount of tax relief you’ll get. There are three key rules for this that you should keep in mind:

  1. A capital loss first reduces capital gains of the same tax year.
  2. If capital losses exceed gains you made for the year, they are carried forward and must be used in the first later year to reduce gains more than your annual exempt amount.
  3. If any losses remain unused after 2. they are carried forward and used against gains in the next later year that you have gains exceeding your annual exemption.

The following examples show how the timing of a loss can affect the amount of tax payable.

Example – rule 1. Jaz is a higher rate taxpayer. In December 2021 he makes a capital gain from the sale of shares of £8,000. On 10 March 2022 he makes a capital loss of £5,000 from the sale of Bitcoin. These are the only capital gains transactions he makes in 2021/22. The loss reduces the gain to £3,000. As this is less than the CGT annual exemption of £12,300 the loss has had no effect on Jaz’s tax bill.

Tip. If Jaz had sold the Bitcoin after 5 April 2022 the loss is not used to reduce the earlier gain because it’s in a different tax year. This means the loss is available to reduce gains and the CGT bill of that later year in which Jaz makes gains that exceed his annual exemption.

Example – rules 2 and 3. The circumstances are the same as for the previous example except Jaz sells his Bitcoin for a loss of £5,200 on 6 April 2022, i.e. in 2022/23. He makes no capital gains in that year but in 2023/24 he sells some shares for a gain of £9,000. This is less than the CGT annual exemption and so the £5,200 losses aren’t taken into account. In 2024/25 Jaz sells a residential property and makes a gain of £17,000. Assuming the current tax rates still apply, Jaz’s CGT bill for this would be £1,316 (£17,000 – £12,300 annual exemption = £4,700 x 28%). But as the gain exceeds the annual exemption of £12,300, £4,700 of the £5,200 loss from 2022/23 is deducted from the gain reducing it to the level of the annual exemption and the tax bill to zero. While deferring the sale of Bitcoin in 2022 meant Jaz lost an extra £200, it saved him £604 in tax.

Trap. Delaying or advancing a transaction to improve CGT relief is always a risk. It could work for or against you. Nevertheless, it’s worth considering if the loss would otherwise not save you any tax.

If a transaction will result in a loss which will only reduce a gain already covered by your annual capital gains tax exemption, meaning there’s no tax to pay, consider advancing or delaying it. It’s possible that the loss can then be used in later years to reduce gains exceeding the annual exemption on which tax is payable.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.