Crystallising a £42,000 gain: spouse, pension or phased sales
Mr S is 58, a higher-rate taxpayer, and holds £60,000 of shares in his former employer with a cost base of £18,000. He wants to sell the whole holding to fund a house renovation starting in about six months. His wife has no income and no investments. Assume: a CGT annual exempt amount of £3,000 per person; CGT at 18% within the basic-rate band and 24% above it; a basic-rate band of £37,700; Mr S has £8,000 of his basic-rate band unused; an ISA allowance of £20,000; and that a personal pension contribution is paid net of 20% and extends the basic-rate band by the gross amount.
1. Calculate the CGT if Mr S sells the entire holding now.
Read the worked answer
Step 1 - gain. £60,000 proceeds − £18,000 base cost = £42,000 gain.
Step 2 - deduct the exemption. £42,000 − £3,000 = £39,000 taxable.
Step 3 - split by rate. Gains are stacked on top of income, so his remaining basic-rate band is used first:
- £8,000 × 18% = £1,440
- £31,000 × 24% = £7,440
Total CGT = £8,880, leaving net proceeds of £60,000 − £8,880 = £51,120.
The key insight is that the £8,000 of unused basic-rate band is a wasting asset: it saves 6p in the pound on the first £8,000 of gain, and it disappears at the end of the tax year.
2. Calculate the effect of transferring half the shares to his wife before the sale.
Read the worked answer
Assume an outright, unconditional gift for no consideration, with no agreement to return the proceeds - otherwise the anti-avoidance rules on settlements apply and the benefit is denied.
Each spouse then holds £30,000 of shares with a £9,000 cost base, giving a gain of £21,000 each.
Wife (no other income, full basic-rate band available):
- £21,000 − £3,000 = £18,000 × 18% = £3,240
Mr S:
- £21,000 − £3,000 = £18,000 taxable
- £8,000 × 18% = £1,440; £10,000 × 24% = £2,400 → £3,840
Combined CGT = £7,080, a saving of £1,800 against £8,880.
Why it works: two exemptions (£6,000 rather than £3,000) and the wife's unused basic-rate band absorb gain at 18% instead of 24%. Constraints: the transfer must be genuine and completed before sale, the couple must be living together, and the timing must leave six months for the renovation - nothing here should be done purely to save 6p in the pound if it delays the funding.
3. Identify two further options and assess their trade-offs given the six-month timescale.
Read the worked answer
Option 1 - personal pension contribution. Paying £31,000 net (£38,750 gross) extends his basic-rate band by £38,750, so the whole £39,000 of gain would sit at 18%: CGT £7,020 instead of £8,880, a saving of £1,860, plus basic-rate relief on the contribution.
Trade-offs: the money is locked until age 55 (57 from 2028) - he is 58, so access is close, but not in six months. It is only useful if he has £31,000 of other money to contribute, since the share proceeds are needed for the renovation. The contribution is capped by his relevant earnings and annual allowance.
Option 2 - phase the disposal across two tax years. Sell roughly half before 5 April and half after, using two annual exemptions and the basic-rate band twice. Saving is similar to the spousal route and does not require a transfer - but the renovation needs funding in six months, so only part of the holding can realistically slip into the next tax year.
Option 3 - shelter the remainder in an ISA. The £20,000 allowance does not avoid CGT on crystallising the gain, but it stops future growth on the retained shares being taxed. Worth checking whether the shares can be transferred into an ISA in specie, and whether he wants to keep any exposure at all given they are former-employer shares - concentrated in his own human capital history.
Judgement: combine the spousal transfer with a partial cross-year sale, and only use the pension if he has separate cash and does not need it before 55. Confirm the client's actual cash requirement and dates before choosing.