If you have significant capital gains within your portfolio then it is important to utilise the annual capital gains tax allowance. For the 2012/13 tax year this is worth £10,600 per person, and is one of the most generous annual allowances in the world.
Any disposals within this figure are exempt from capital gains tax.
This means that you can use your tax-free allowance each year by selling off just enough shares (or other qualifying assets) to realise a gain equivalent to the annual exemption.
Utilising this exemption could also significantly boost your overall return over a number of years.
Please note that this allowance does not carry forward. So this means that if it is not used in the tax year then it is lost!
To view the allowances for previous years please use this link:
John has a significant share portfolio and is a higher rate taxpayer.
For 2012/13 he will be liable to capital gains tax at 28% on any gains in excess of his capital gains tax annual exemption.
He has held these shares for a number of years, and has always made use of his annual exemption for capital gains tax purposes, selling sufficient shares to realise a gain approximately equal to the capital gains tax exempt amount (£10,600 for 2012/13).
By utilising his annual exemption for 2012/13 he is saving £10,600 @ 28% = £2,968 in tax.
This means that as a result of using his annual exemption each year and only making disposals within the annual exemption rather than disposing of his shares all in one go, he is much better off as any gains on the shares are realised tax-free.
Not So Smart Jack
Jack sells off shares and realises gains of £25,000 in 2012/13. He has other income of £50,000.
As he is a higher rate taxpayer, he pays capital gains tax at 28%.
The annual exemption of £10,600 is set against the gain of £25,000, leaving net chargeable gains of £14,400. He pays tax on these gains of £4,032 (£14,400 @ 28%), leaving him with £20,968 after tax to reinvest.
Compare this with John, who realised his gains completely tax-free by selling his shares over a number of years and making best use of the annual allowance. As a result, John is 16% better off than Jack.