Wed 03 February
I was convinced that Darling would announce a rise in Capital Gains Tax (CGT) in the pre-Budget report. I was wrong, but I believe it’s only my timing that was out.
If the burden of the public deficit is to fall to those with the broadest shoulders, a top rate of CGT of just 18% for those paying 40% or 50% income tax seems simply unsustainable.
A rise in CGT to 25% or even 30% is widely predicted. Therefore, there is a short time to take advantage of the rules as they stand between now and probably the end of the tax year. It makes economic sense to use all of the tax allowances and rules to your advantage and certainly if you are planning to make gains. I see no reason why the tax situation on capital gains will improve – the reality is they are likely to get worse.
2. You are only taxed on profits above the capital gains tax allowance (£10,100 for tax year 2009/10 and 2010/11).
A rise in CGT to 25% or even 30% is widely predicted.
3. If you are married (or in a registered civil partnership), make use of both of your CGT allowances. Investments can be transferred between you without tax charge and then cashed in – known as Bed & Spouse. Please note you should not Bed & Spouse then have the proceeds passed back to you. This is commonly known as a circular transaction and HMRC might disallow the tax planning benefits if you did so.
4. CGT is paid at a flat rate of 18%. We believe that the rate will increase, probably to 25%. Save CGT by making large gains in this tax year before rates might rise.
5. Use the proceeds of encashments to fund your ISA allowance, known as Bed & ISA. Investments within ISA pay no CGT. Those aged 50 this tax year can shelter £10,200 in ISA, other investors £7,200.
6. Use the proceeds of encashment to fund a pension, known as Bed & SIPP. Almost everyone up to age 75 can contribute to a SIPP and obtain tax relief at the basic rate, even if you are a non-taxpayer. SIPPs pay no CGT on the growth in the fund.
7. Use the proceeds to re-balance your portfolio or diversify your investments, Bed & Spread
8. Offset any losses you might have against gains. CGT losses can be carried forward indefinitely but you need to register them on your tax return within 5 years
It makes economic sense to use all of the tax allowances and rules to your advantage...
9. Remember, even at a higher rate of 25%, investments subject to capital gains tax are still likely to be more favourable than those taxed purely on income such as investment bonds, which are taxed on all profits up to 40% rising to 50% from April 2010.
10. Some more sophisticated investments are CGT free such as EISs (Enterprise Investment Schemes) and VCTs (Venture Capital Trusts).
a. EISs also allow you to defer capital gains and after as little as 2 years can be inheritance tax free. In addition, there is 20% tax relief on the amount that you invest. EISs are for those who can afford to take higher than average risks and invest upwards of £50,000 into the scheme. The contribution limit for tax relief is £500,000 per tax year
b. VCTs offer 30% income tax relief on contributions. The contribution limit is £200,000 per tax year
Please note both EISs and VCTs are generally higher risk, illiquid investments. Tax relief is only available to the extent of the tax that you pay.
Danny Cox
Head of Advice
If the burden of the public deficit is to fall to those with the broadest shoulders, a top rate of CGT of just 18% for those paying 40% or 50% income tax seems simply unsustainable.
A rise in CGT to 25% or even 30% is widely predicted. Therefore, there is a short time to take advantage of the rules as they stand between now and probably the end of the tax year. It makes economic sense to use all of the tax allowances and rules to your advantage and certainly if you are planning to make gains. I see no reason why the tax situation on capital gains will improve – the reality is they are likely to get worse.
Here are my top Capital Gains Tax saving tips
1. You pay no CGT until you realise profits, either by cashing in your investments or transferring them to someone else (other than your spouse). In this way CGT can be deferred indefinitely and your investment benefits from gross roll up (no tax until encashment).2. You are only taxed on profits above the capital gains tax allowance (£10,100 for tax year 2009/10 and 2010/11).
A rise in CGT to 25% or even 30% is widely predicted.
3. If you are married (or in a registered civil partnership), make use of both of your CGT allowances. Investments can be transferred between you without tax charge and then cashed in – known as Bed & Spouse. Please note you should not Bed & Spouse then have the proceeds passed back to you. This is commonly known as a circular transaction and HMRC might disallow the tax planning benefits if you did so.
4. CGT is paid at a flat rate of 18%. We believe that the rate will increase, probably to 25%. Save CGT by making large gains in this tax year before rates might rise.
5. Use the proceeds of encashments to fund your ISA allowance, known as Bed & ISA. Investments within ISA pay no CGT. Those aged 50 this tax year can shelter £10,200 in ISA, other investors £7,200.
6. Use the proceeds of encashment to fund a pension, known as Bed & SIPP. Almost everyone up to age 75 can contribute to a SIPP and obtain tax relief at the basic rate, even if you are a non-taxpayer. SIPPs pay no CGT on the growth in the fund.
7. Use the proceeds to re-balance your portfolio or diversify your investments, Bed & Spread
8. Offset any losses you might have against gains. CGT losses can be carried forward indefinitely but you need to register them on your tax return within 5 years
It makes economic sense to use all of the tax allowances and rules to your advantage...
9. Remember, even at a higher rate of 25%, investments subject to capital gains tax are still likely to be more favourable than those taxed purely on income such as investment bonds, which are taxed on all profits up to 40% rising to 50% from April 2010.
10. Some more sophisticated investments are CGT free such as EISs (Enterprise Investment Schemes) and VCTs (Venture Capital Trusts).
a. EISs also allow you to defer capital gains and after as little as 2 years can be inheritance tax free. In addition, there is 20% tax relief on the amount that you invest. EISs are for those who can afford to take higher than average risks and invest upwards of £50,000 into the scheme. The contribution limit for tax relief is £500,000 per tax year
b. VCTs offer 30% income tax relief on contributions. The contribution limit is £200,000 per tax year
Please note both EISs and VCTs are generally higher risk, illiquid investments. Tax relief is only available to the extent of the tax that you pay.
Danny Cox
Head of Advice
