Tax year-end planning: avoiding withdrawal symptoms

Years of planning how best to put money into your portfolio can be ruined by not planning how to take it out again.

Since financial advisers often talk about ‘investment goals’, it’s easy to assume that accomplishing said goals means you’ve reached the finish line. However, thanks to the tax implications associated with certain disinvestments, hitting the ‘golden number’ inside your portfolio isn’t the end of the story.

Here we discuss the two main tax planning concerns for investors who are thinking of disinvesting.

Capital gains tax

Capital gains tax (CGT) planning is of particular relevance to those with large holdings inside non-tax-sheltered investment wrappers who are looking to disinvest. Essentially, this is relevant to you if you’re invested in funds that are held outside the protection of a pension or an Individual Savings Account (ISA).

The prime example of such an account is the general investment account (GIA). This is the type of account advisers tend to recommend if you’ve maxed out your ISA and you don’t want to lock any more money away in a pension. Before disinvesting from – or even switching funds within – a GIA, you need to be mindful of the tax implications.

That’s because you can only realise £11,700 (2018/19) or £12,000 (2019/20) worth of gains in a single tax year. Selling an investment of any kind – be it fine art, a buy-to-let property or an equity tracker fund – is called a ‘disposal’.

Once a disposal is made, any tax payable is due on the 31 January after the end of the tax year. The rules are slightly different for property – currently, CGT is due up to 21 months after completion of the sale. From April 2020, this window is set to shrink dramatically, to 30 days.

What counts as a disposal for CGT purposes?

There isn’t an exact definition of what counts as a disposal, but since the Government recently declared that gains made by trading unregulated digital currencies like bitcoin will be liable for CGT, the rules are pretty comprehensive. A simple rule of thumb is that, if you’re selling something at a higher price than you paid for it, it’s worth double checking you’re not going to incur a CGT liability.

What are the rates of CGT?

Gains over £11,700 are taxed at 10% if you’re a basic rate taxpayer, and 20% if you’re a higher or additional-rate taxpayer. To give you an example of how this works in practice, see the example below.

Barry and Paul both invested £500,000 into identical investment portfolios in a GIA in 2001. Barry is a basic-rate taxpayer; Paul is a higher-rate taxpayer. Neither of them had declared any losses in previous tax years to offset their future CGT liability.

In 2019, each one’s portfolio is now worth £750,000 i.e. a 30% cumulative gain – roughly in line with the FTSE All-Share Index over the same time period. If both were to ignore their financial advisers and encash everything in a single tax year, each would realise a taxable gain of £750,000 - £500,000 - £11,700 = £238,300. For Barry, this would mean a tax bill of £23,830. For Paul, the tax bill would be double, at £47,660.

What else do I need to consider?

It gets even more complicated if you’ve got a type of life insurance contract called an investment bond, because encashing units in an investment bond involves your adviser carrying out a complex calculation known as ‘top slicing’.

Top slicing takes into account the number of years you’ve held the policy and any previous encashments you may have made. If not followed correctly, top slicing rules can land you with an enormous tax bill that negates the benefits of encashing units in the first place.

The rules are also different for investment properties. While main residences are entirely exempt from CGT, second homes and buy-to-let investments incur CGT at 18% and 28% for basic-rate and higher-rate taxpayers respectively.

Tax changes for landlords

The good news for landlords is that, if you’re a basic-rate taxpayer, you can still offset mortgage interest against rent revenue for tax purposes. Since April 2017, you also get an annual £1,000 tax-free allowance on rental income.

The not so good news is that, thanks to George Osborne’s Section 24 amendment of the 2015 Finance Bill, mortgage interest tax relief for higher and additional-rate taxpayers will continue to be phased out. In the 2018/19 tax-year, 50% of mortgage interest costs can be deducted from rental income before tax charges are applied. In the 2019/20 tax year, this amount goes down to 25%. By 2020/21, mortgage interest will no longer be classed as a business expense for individual buy-to-let landlords, which for many will mean a substantial drop in profits.

If I’m a higher or additional-rate taxpayer whose profit margins are going to suffer, should I sell up?

Whatever you do, it’s important to weigh up all the options carefully. As noted earlier, gains from selling your buy-to-let investment properties will attract a CGT charge of 28%.

Some landlords have decided to form limited companies in response to the new rules, as limited companies can deduct 100% of all operating costs from revenues for tax purposes. But this is not an option to be entered into lightly either.

As specialist landlord accountant Tony Gimple argues, “incorporation is not the holy grail”– as limited companies suffer higher interest rates, more expensive transactional costs and fewer protections as mortgage borrowers.

Switching ownership of your portfolio from personal to corporate will also require you to qualify for something called ‘S162 corporation relief’. This, according to Gimple, can take up to two years to be approved by HMRC, and if you don’t get it, you’ll potentially end up with a hefty (possibly overdue) CGT and Stamp Duty Land Tax (SDLT) bill.

What should landlords do next?

A policy proposal published by thinktank Onward in October 2018 sheds some positive light on the matter. Given the Government’s growing need to appeal to the interests of ‘generation rent’, Onward suggested the idea of allowing landlords to get 100% CGT relief if they sell their properties to sitting tenants at a discount (provided the tenants have lived there for at least three years).

This would, in theory, produce a win-win scenario for everyone: tenants wouldn’t need to find such large mortgage deposits, landlords’ discounts would be more than compensated by the abolition of CGT, and the Government would be able to help generation rent without alienating landlord voters.

Chancellor Hammond has yet to say whether or not he’ll be taking the idea on board. However, it was widely speculated that the policy would be included in the 2018 Autumn Budget, so the idea is certainly on his radar.

This, along with ongoing uncertainty in the property market over Brexit, may mean that the best course of action for landlords is to just wait and see. But if you’re keen to act sooner rather than later, seeking professional advice could help you avoid making a costly mistake that can’t be undone.

Taxation can be complex and is subject to change. You should seek professional advice to ensure you achieve the most suitable outcome

Subscribe to our newsletter

Enter your email address to receive the AFH Wealth Management newsletter.

By subscribing you agree to the AFH Group privacy policy.


Find all the latest industry news, all written by our in-house industry experts.

Avoid being a victim of a pension scam

Many of us think that we are too savvy to be a pension scam victim, but the statistics show that it is surprisingly easy for even more sophisticated investors and savers to get caught out.

Read now

What the Governments new green plans could mean for you

The UK’s ‘net zero’ strategy – a path aimed to get the nation to net zero carbon emissions by 2050, will have implications for all of our finances, whether we like it or not.

Read now

Dealing with volatility

Bumpy rides in the stock market are nothing new, but they can be hard for investors to deal with. In the last few weeks, we’ve seen more stock market volatility, with energy prices and supply chain fears weighing on prices.

Read now

What the Budget means for you

The Chancellor’s long-awaited Budget did not include some of the stings that many savers and investors feared, including lower thresholds before those realising gains paid capital gains tax and more restrictions on tax relief for pension savers.

Read now

Find out how we can help you:


Book a consultation


Our offices