Concentrated Holding, Deposit and CGT
Priya, 54, is an additional-rate taxpayer. Her general investment account (GIA) is worth £900,000, of which £405,000 is a single FTSE 100 holding that cost £180,000; the rest is a diversified portfolio with modest gains. She needs £120,000 in 18 months for a house deposit. Her husband, Raj, 56, is a basic-rate taxpayer with a salary of £30,000, no investments of his own and £250,000 in cash. They have two children at university. Priya wants to 'sell the lot and start again' to reduce concentration risk, but also wants to pay as little tax as possible. She has read that Enterprise Investment Scheme (EIS) shares 'wipe out the tax' and asks whether she should put the entire sale proceeds into an EIS. She has not used any of this year's ISA allowance. The couple have no carry-forward capital losses.
1. Quantify the capital gains tax on selling the single holding and recommend a disposal sequence.
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The tax if she sells the whole holding
Sale proceeds £405,000 less cost £180,000 = gain £225,000. After the £3,000 annual exempt amount, £222,000 is taxable. As an additional-rate taxpayer, the shares gain is taxed at 24%, giving about £53,280. That is a large tax bill to raise £120,000.
Sell only what the deposit needs
She needs £120,000, not £405,000. The gain element of the holding is £225,000 ÷ £405,000 = 55.6%. Selling £120,000 therefore realises about £66,700 of gain. After the £3,000 exemption, £63,700 at 24% is about £15,300. The remaining £285,000 of stock can be diversified gradually over later tax years.
Use Raj's exemption and rate band
A genuine outright transfer of part of the holding to Raj before sale is a no gain/no loss disposal between spouses. If £60,000 of stock is transferred, each sells £60,000. Each gain is about £33,300; after each £3,000 exemption, £30,300 is taxable. Priya pays 24% = £7,272. Raj has £20,270 of basic-rate band left (£50,270 − £30,000 salary), taxed at 18% = £3,649, and £10,030 at 24% = £2,407, total about £6,056. Combined tax is about £13,328, a saving of roughly £2,000 against selling £120,000 in Priya's name alone. The saving is modest because most of the gain is still at 24%.
Sequence
Sell £120,000 now, using the annual exemptions and Raj's basic-rate band. Then use future years' allowances, bed-and-ISA where appropriate, and loss harvesting to diversify the balance. Do not sell the whole holding simply to 'start again' - that crystallises £53,000 of tax unnecessarily.
2. Evaluate Priya's proposal to put the entire sale proceeds into an EIS.
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What EIS relief actually does
EIS shares can give 30% income tax relief (subject to the annual cap), CGT deferral, loss relief and, if held long enough, tax-free growth. But deferral is not exemption: the deferred gain comes back into charge when the EIS shares are sold or the deferral ends. The shares must be new, paid for in cash, in a qualifying trading company, and held for at least three years. They are illiquid, high-risk and often fail.
Why it is wrong for this money
The £120,000 is needed in 18 months for a house deposit. EIS shares cannot be relied on to be saleable then, and their value can fall sharply. Using the deposit money would be a serious liquidity and capacity-for-loss mismatch. Even the surplus £285,000 should not be committed wholesale: EIS is a high-risk satellite holding, not a replacement for a diversified portfolio.
VCT comparison
VCTs offer 30% income tax relief up to £200,000, tax-free dividends and tax-free gains, but require a five-year hold, trade at volatile net asset values and carry fees. VCTs do not defer the existing gain in the way EIS can. They are also unsuitable for the deposit.
Recommendation
Keep the £120,000 in cash, short-dated gilts or a low-volatility deposit account. Use ISAs for the longer-term money: £20,000 each this year, and bed-and-ISA transfers in later years. Consider EIS only for a small part of genuinely surplus capital, after assessing her attitude to risk, and never let the tax tail wag the investment dog.
3. Explain the mechanics and pitfalls of an inter-spouse transfer before sale.
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Mechanics
A transfer of shares between spouses who are living together is treated as made at no gain/no loss under TCGA 1992 s58. The receiving spouse takes the transferor's base cost and acquisition date. If Raj then sells, the gain is assessed on him, using his own annual exempt amount and his own rate band. The transfer must be outright and genuine: a bare nominee arrangement or a transfer on terms that leave Priya in control may be challenged.
Pitfalls
- The 30-day matching rule: if shares are sold and the same class is repurchased within 30 days, the disposal is matched with the repurchase. A same-day sale and repurchase inside an ISA does not crystallise the gain in the way many clients expect. To use the exemption, wait more than 30 days or buy a genuinely different exposure, and document the investment rationale.
- Raj's rate band depends on his income. His £30,000 salary uses most of the basic-rate band, so only about £20,270 of gain is taxed at 18%; the rest is at 24%.
- If either spouse is non-UK resident or non-UK domiciled, the position changes.
- Transfers should not be made shortly before divorce or where creditors may be affected.
- Record the transfer date, price and share certificate, and keep the original cost details.
Planning point
The saving from using Raj's allowance and band is real but limited. The bigger win is not selling the whole holding at once; spreading disposals over tax years and using ISAs will save more than a last-minute spousal transfer.