Using capital losses effectively

With the 5th April tax year end fast approaching, some investors will be looking to minimise their capital gains tax liability on assets (usually shares) sold at a profit. In the last 12 months, most shares have performed well but there may have been some shares sold at a loss. Using these losses effectively needs some planning.

As a result of the capital gains annual exemption, the loss will reduce the amount chargeable to capital gains tax but may not reduce the amount of capital gains tax payable.

So here are some rules of thumb:

1/. Only sell the loss-making assets to claim a capital loss in a tax year when your gains (before losses) are more than the capital gains annual exemption (£10,100 in 2009/10). You will not benefit from the loss claim if you would not have paid tax on the gains

2/. If you have sold assets at a loss and your planned disposals will generate capital gains lower than the annual exemption, consider not making any disposals at a profit in that tax year. The loss can be carried forward where it is relieved after the annual exemption is taken into account. When claimed, losses carried forward to a later year always reduce capital gains tax liabilities.

As you are aware, there are no capital gains tax liabilities for shares held in an ISA which is, therefore, very tax-efficient.