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Is CGT deferral always the best decision?

Where CGT deferral is possible e.g. via EIS investments, should this always be taken up?

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CGT deferral has clearly been advantageous historically due to the low tax rates for the last decade. But I wonder if this can be presumed for the future. Could crystallising CGT liability now could be more beneficial than deferral because when that charge appears down the line, the prevailing rate may be higher - perhaps even double, say by 2026!

Obviously this is a question of opportunity cost and market timing of post pandemic CGT rates, but am I broadly correct in that there IS a decision here, or is maximum deferral (e.g. from EIS investments) generally a no brainer?

Thanks!

Replies (14)

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Stepurhan
By stepurhan
19th Jul 2021 08:34

If you have reason to think CGT rates will double by (say) 2026, then crystallising a gain now is likely to be a good idea.

Do you have reason to think that? If so, please share.

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By raharley0
19th Jul 2021 11:06

They wouldn't have to double to make crystallising a better idea now. - CGT at 25% or 30% may negate any opportunity cost in the meantime. General point is - do you think CGT is higher or lower by 2026? My guess is we are moving towards parity with income tax, parity with other European nations (around 25-30%). There is also govt risk (change of tax policy) before then.

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Stepurhan
By stepurhan
19th Jul 2021 12:43

But is it purely a guess, or do you have reason to think that it will go up?

Others have pointed out various scenarios under current rules why you might want to crystallise a gain now. An expected increase in the CGT rate is not one of them.

So, the answer to your question is you make the decision at the time based on the information you have. If that information includes a definite increase in CGT at some future date, then that is a factor in your decision-making. I would not recommend making a decision based on a "guess" on what is going to happen in the future.

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By Hugo Fair
19th Jul 2021 13:21

Quite agree, personally.
But ... when you say you "would not recommend making a decision based on a "guess" on what is going to happen in the future" - you have probably described the MO of OP (given that her/his by-line states Investor Personal)!

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By raharley0
19th Jul 2021 14:12

You are not wrong.
I have a large CGT bill this year all potentially deferred by EIS investments.
Accountant recommended deferral (with no discussion).
Asking the question as my day job IS to make guesses about the future, in a market/technology/business sense so hard to turn that off when it comes to tax !
But nrw's answer basically deals with it. thanks all.

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Replying to raharley0:
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By Cheshire
19th Jul 2021 15:11

If your Accountant didn't expand/explain go back to them and aka for more info.

Drives me nuts the number of so called Accountants who expect their clients to be mind readers or as qualified/experienced as they are.

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Psycho
By Wilson Philips
19th Jul 2021 08:47

The answer is simple - deferral isn't always the way to go. Sometimes you might need a crystal ball, in other cases the inforamtion is all there.

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By SteveHa
19th Jul 2021 09:00

We often consider whether or not arranging a transaction so as to crystalise a gain now is the best course of action, and often times it is.

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By nrw
19th Jul 2021 09:30

HRMC provides 5 years from the date that the SA return is due, to claim EIS CGT deferral (and income tax relief). In practice this often amounts to >6 years from the date of the investment and >7 years from the date of the gain to be deferred.

*IF* cashflow is not a concern (and P&L is the priority), then it makes sense to hold off claiming both CGT deferral and income tax relief (HMRC even pays 0.5% interest, tax-free on both - which beats anything else available on cash!).

Whilst delaying the claim of CGT deferral is often a no-brainer, it can also make sense for income tax relief as if the relief were to be subsequently removed (eg disposing of the shares within 3 years) then it cannot then be claimed against another EIS investment - however if it wasn't claimed in the first place then it obviously can (against the same income). This benefit is greatest for industrious EIS investors who are juggling across tax years etc.

Summarising, a crystal ball is nearly available where EIS is concerned! Decisions can be made once future tax policy / personal circumstances are clear.

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By raharley0
19th Jul 2021 11:01

Thankyou, very helpful.
Could you direct me to the where HMRC discusses removal of income relief due to EIS sale within 3 years and how that then can't be used again? I can't see this in the EIS manual.

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By nrw
19th Jul 2021 11:27

The removal of relief on disposal of shares within 3 years of subscription is clear (along with other disqualifying events).

I haven't dug through to find where the revived income tax can't be relieved again - I gleaned this from a dialogue with HMRC upon an EIS share sale within 3 years of subscription and accepted it without challenging / digging much further as there weren't any other replacement EIS investments available anyway. As with everything on these forums, speak to your accountant rather than take my word for it.

If you are still within the window for amending an SA return (12 months after the filing deadline), then presumably you could simply amend the SA return to remove the EIS claim and apply another one - but it's beyond this that may get trickier. Delaying the claim is far simpler, cashflow permitting.

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By TASG
21st Jul 2021 10:44

Obviously if total gains / shareholder < £12,300, crystalising is the way to go.

Any forward forecasts on political appetites for altering future CGT rates are way beyond my professional training.

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By Comptable
21st Jul 2021 11:40

Of course there is also the scenario where the gain is crystallised and the CGT paid before the rates go up (assuming they do), and then the owner of the asset dies whilst still owning it. OOPS.

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