Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about using the capital gains tax (CGT) annual exemption by transferring shares in a listed company into an ISA.
‘Over the years, my client has accumulated shares in a listed company. The value has increased more than he envisaged such that a substantial potential capital gain would arise on disposal. To mitigate this, over the past few years he has transferred tranches of shares to an individual savings account (ISA) where the gain has used his annual exemptions.
The efficiency of this will be reduced by the halving and halving again of the annual exemption this year and next.
Do Taxation readers have any views on whether I should suggest to the client that he worries less about staying within the annual capital gains exemption? Perhaps he should simply transfer more shares each year on the basis that, while he may pay a one-off capital gains tax charge, he will save tax on the dividends that will be paid into the ISA from then on.
Are there any other considerations or factors to be taken into account?’ Query 20,169 – Isaac.
Terry Jordan’s reply: Shares could not benefit from inheritance business property relief
Isaac says that his client has been transferring tranches of shares in a listed company to an individual savings account (ISA).
Pedantically this is not possible. The client has presumably been selling shares each year and buying them within the ISA having transferred cash proceeds within the annual £20,000 limit: so-called ‘bed and ISA’ transactions.
As Isaac points out the annual capital gains tax exemption has been reduced from last year’s £12,300 to £6,000 this tax year and to £3,000 from 6 April 2024 where it will remain for the foreseeable future. His client would pay CGT on any gains realised over the annual exemption at a maximum current rate of 20% and it might be that a change in government would lead to an increase in rates.
The Resolution Foundation and the abrdn Financial Fairness Trust have proposed a lifetime cap on ISA savings of £100,000 and presumably there would be some grandfathering provisions regarding existing savings if such a cap were to be introduced.
We are not told if Isaac’s client is married or has a civil partner. A surviving spouse or civil partner can ‘inherit’ a deceased’s ISA by making contributions within three years of the death to their own ISA in addition to the £20,000 annual limit.
On the premise that the shares are listed on a recognised stock exchange they would not benefit from inheritance business property relief (BPR), but at an appropriate time could be sold and the proceeds reinvested in shares on the alternative investment market (AIM); most but not all of which benefit from BPR once owned for two years. Most AIM shares do not now incur stamp duty on purchase either.
While the client would obviously need investment advice, my tax advice would be to continue to maximise ISA contributions either at some CGT cost or, if in a position to do so, by using cash savings.
The full article is also available on the Taxation website.
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