Capital Gains Tax Exemption

The majority of my dental clients are typically able to maximum fund their Individual Savings Accounts (ISAs) of £7,200 each year and make decent contributions into their pensions, either personal, NHS or in some cases both.
 
But for those who want to continue to invest in stocks and shares, or equities, there is a tax efficient way to invest a significant amount outside of ISAs and pensions. You can also have tax free withdrawals for the life of the investment, no capital gains tax on death and access to the whole investment at any point should you need to cash it in.
 
This is achieved by making the most of the CGT annual exemption allowance of £9,600 and combining it with the part-disposal calculation of gains under collective investments (funds which take money from a number of private investors and pool them together, such as Open Ended Investment Companies - OEICs and Unit Trusts).
 
Let’s look at how it works in an example using a dentist who invests £300,000 in a Unit Trust. They have full use of their annual allowance which escalates at 2% annually and the value of the investment grows at 6 per cent a year after charges. The dentist requires a withdrawal of capital of £15,000 (5 percent) a year.
 
You don’t need to know the calculation to work out the gain each year but if you’re interested it’s simply the Amount Withdrawn less Investment x Amount Withdrawn ÷ (Amount Withdrawn + Value of investment after withdrawal). This leaves us with a gain in the first year of £849 which is less than the annual allowance of £9,600 so no CGT is payable.
 
In year two, the gain would be £1,650 and assuming the above assumptions, withdrawals of 5% a year would never become liable to tax.
 
Please note I’ve not taken into account any income yield, focusing only on capital growth. Any income arising (interest or dividends) would result in tax being payable. However you can choose to simply invest in growth funds where there is limited or no income payable.
 
In addition, in the above example you would not need to report any of the gains to HM Revenue & Customs as the gains are below the allowance. However it is worth remembering that if the withdrawals are four times higher than the annual allowance (which would be £38,400) it would need to be reported even if there was no gain. Now not everybody knows that, but now you do.