Capital gains Tax increase, your questions answered

Nottingham News

The government has signalled that it intends to increase CGT (Capital Gains Tax) and initially said that it would move the rate payable to be more in line with the higher rates of income tax, albeit with exemptions in place for entrepreneurs who build businesses and then sell them.

The proposed rise in CGT would hit many including those with buy to let or holiday properties, investors in shares, OEICs and Unit Trusts, and members of company share save schemes.

Since the original announcement there has been a groundswell of resistance to the measure leading to the new Work & Pensions Secretary, Iain Duncan Smith, to seek to play down people’s fears over the CGT rise saying, “He (George Osborne) has also talked about major exemptions for all sorts of different groups, because we don’t want this to harm entrepreneurs, we don’t want to harm families that are heading towards retirement who have actually saved”

The emergency budget will take place on 22nd June; here we look at some of the questions posed to us recently by our clients.

“Should I be doing anything now in light of the proposed changes?”

The key here is not to let the tail wag the dog, in other words do not let commercial considerations be dictated by tax.

If you were planning on taking a profit from an investment, maybe from a share portfolio, OEIC or Unit Trust then you are probably wise to continue with this plan and do so before 22nd June as the CGT rate is very likely to rise.

However, you may have an investment that is showing a gain, which you were not planning to realise, but do want to reduce the potential tax liability, this is more complex.

We have seen a number of clients in this situation where they have recently sold an investment to realise the gain, paid the tax at what they believe will be a lower rate, and then repurchased the asset, essentially ‘rebasing’ the purchase price. This can be beneficial, however there are complex rules around this type of activity when shares are concerned and of course the cost of buying and selling need to be taken into account. If you are considering this type of manoeuvre we would strongly suggest you take advice from an Independent Financial Adviser.

Property of course is less liquid that other forms of investing. It is unlikely that you will be able to prepare a property for market and find a buyer in the time available before the emergency budget. However if you do decide to sell and are lucky enough to find a buyer, remember it is the date you exchange contracts that is crucial and not the date of the actual sale.

“What could the government do to CGT?”

This really is the $64,000 dollar question that we won’t fully know the answer to until the budget.

It seems that the original plans were to increase the headline rate of CGT to a level more in line with income tax. This is because with CGT at 18% and the higher income tax rates at 40% and 50% higher earners are designating ‘income’ as ‘capital gains’ and paying a substantially lower rate, the government feel this is unfair and wants to put a stop to it.

It is likely that the rate will indeed rise. Although it is also likely that reliefs will be put in place for those people that build a business and then subsequently sell it, this is currently the case and is known as ‘entrepreneurs relief’ with a tax rate of just 10% on gains of up to £2 million arising from the sale of a business. If Iain Duncan Smith’s comments are to be believed then it also seems that additional reliefs may be put in place for various different groups such as long term savers.

The government also could alter the annual exception, currently £10,100 above which gains are taxed, but there has been little mention of this.

Finally, there have been calls from many experts for the return of the ‘indexation allowance’ which meant that tax was not paid on any gains that resulted simply from the effects of inflation, again the government have been quiet on this point.

“Is there anything else I should be doing?”

Avoid knee jerk reactions to speculation which can change from day to day and take advice from a professional, it is not as simple as looking at the gain and the potential CGT, there are other considerations too such as costs, Inheritance Tax, your personal circumstances as well as issues affecting the performance of the asset you wish to sell.

If you do intend to sell an asset that is owned in your sole name but you are married consider the benefits of transferring it into joint names before you sell so that you benefit from two annual exemptions of £10,100 and not just one, again professional advice should be taken.

“Where can I invest without paying CGT?”

Of course CGT is only charged on the sale of certain assets, there are plenty of investments where it is not charged.

Many do not feel that their home is an investment, but in the eyes of the tax man it is. The good news is that any increase in the value of the property deemed to be your main residence is free of income and CGT. Therefore, as many MPs have found out, investing in your main home can be particularly tax efficient.

If you are saving for retirement via a pension this is also extremely tax efficient. Contributions attract tax relief, growth on the fund is tax efficient and when you come to take your pension a tax free lump sum of up to 25% of the fund is still currently available. Although you should remember that income from the pension is subject to income tax.

If you want to shelter your savings from tax then consider a Cash ISA. You can invest £5,100 into a Cash ISA in the current tax year and any interest you receive is tax free. Furthermore consider National Savings & Investments Index Linked Certificates that pay a tax free return linked to inflation.

If you are looking to invest for the medium to longer term then consider Equity ISAs into which an individual can pay up to £10,200 in the current tax year, assuming no money has been paid into a Cash ISA.

Click here to learn more about how ISAs work.

For the more adventurous investor returns from VCTs (Venture Capital Trusts) are tax free and tax relief is available on contributions, be careful though, these are not for the feint hearted and certainly carry significantly more risks that other forms of investment.

Furthermore, make sure your affairs are organised in a tax efficient manner, for example if your spouse is a non tax payer whilst you pay tax make sure he or she holds savings in their name an applies for interest to be paid gross. Arranging your affairs whilst taking into account the various tax exemptions that you and your spouse are entitled to can be the most effective and simple method of tax planning but is often over looked.

Whatever action you decide to take now, consult a professional before you do so, their advice will be invaluable, click here for more information about how we work.