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Tens of thousands of BT employees yesterday received a bumper payout of £1.1 billion as their latest sharesave scheme matured. After saving up to £225 a month for the past five years (close to the maximum permitted £250), some are in line to receive as much as £89,700 in BT shares and will be sitting on capital gains of about £75,000.
While the windfall will be welcome, advisers warn that large profits on employee share schemes can create a tax headache for the unwary. Here we outline the tips that can help you keep hold of more of your gains.
1 When a sharesave scheme ends, investors have up to six months to convert their accumulated savings pot into shares in their company. You can, in many cases, use this time ‘window’ to arrange for the conversion to take place just before the end of a tax year. If you receive, say, £30,000 worth of shares, of which £20,000 is potential capital gains, you could sell £15,000 of shares at the end of one tax year, crystallising £10,000 of gains, and the same amount a few days later in a new tax year, realising a further £10,000 of gains. Since your gains are below the annual CGT allowance of £11,000 in each year there will be no tax to pay.
2 You can also make tax savings by transferring some of your newly acquired shares to your spouse or civil partner, which you can do without incurring CGT. By doing this both people can make use of their annual CGT exemption of £11,000 when they sell the shares. David Cassidy, of Wealth at Work, a provider of financial advice in the workplace, says: “You make a gift of shares to your partner and it is always advisable to put down on paper what you are doing so that there is a record of the transaction.”
3 Making use of your annual Isa allowance of £15,000 can also save you money. You are allowed to transfer your newly acquired shares into an Isa, where there will be no CGT to pay when you sell them.
However, you need to be aware of two important qualifications. Firstly, you must make the transfer within 90 days of exercising your option to convert your savings into shares. Secondly, you cannot transfer in more than your existing unused Isa allowance for that tax year. So if you have already invested £5,000 in this year’s Isa, you can transfer in a maximum of £10,000 worth of shares. If you time things right you may be able to straddle two tax years with your transfers of shares into an Isa, and thus take advantage of two lots of Isa allowances. Mr Cassidy says: “You need to check whether your intended Isa manager will accept these so-called in specie transfers. The majority won’t so you need to do your homework.”
You also need to decide whether you will hold the shares for the long term or sell and switch the money into other investments. If most of your savings are in the shares of the company for which you work, you should consider diversifying into a broader spread of investments. If the company were to struggle, you could lose your job and savings.
4 It is not just people in sharesave schemes who run the risk of clocking up a CGT liability. The same applies to any investor who makes gains of more than £11,000 in any tax year, and the tips about sharing your gains with a spouse and putting profits into an Isa apply there too.
Another tip is to sell any loss-making investments and set the losses against your gains. For example, if you had gains of £20,000 but also suffered losses of £5,000, you would have a gain for tax purposes of only £15,000. You could then deduct your allowance of £11,000, leaving you with only £4,000 liable for CGT rather than £9,000.
Watch out for inheritance tax
Thousands more families will be drawn into the inheritance tax (IHT) net this year, accountants have warned, after new figures showed that death duties being collected are increasing. Rising house prices and a five-year bull market in shares are set to push many people’s total wealth above the threshold of £325,000 at which IHT starts to bite. Tax of 40 per cent is levied above this figure.
This week, Revenue & Customs confirmed that IHT receipts are on an upward curve. They rose by 7.9 per cent to £3.1 billion in 2012-13 and went up even more sharply — by 8.6 per cent — to £3.4 billion in 2013-14.
The number of households hit by IHT is predicted to jump sharply over the coming years.
George Osborne, the Chancellor, has frozen the IHT threshold until at least 2018, meaning thousands more middle-income families will be pushed into the tax bracket.
Last year 26,337 families paid the tax, but this is expected to rise by 35 per cent to 35,611 this year, with a further increase to 43,811 in 2015-16 — a 66 per cent increase in just two years.
Married couples and civil partners can leave everything to their spouse free of IHT. In the process, they can pass on their allowance so the surviving partner can leave up to £650,000 tax-free.
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