Cashing in on the April tax changes
Last updated 21:05, Saturday, 13 September 2008
Last year the Chancellor announced major changes to Capital Gains Tax (CGT). These changes came into force in April this year and have changed the arithmetic of much of the basic planning for those with investment portfolios.
To recap, there are no longer any reductions in tax merely for having held the asset for a number of years or for inflation.
On the other hand, the rate of CGT is no longer the same as your rate of Income Tax and is now fixed for everyone at 18 per cent.
The first £9,600 of capital gains realised in a tax year are completely free of tax. Furthermore, it is a fact that the overwhelming majority of us rarely use this tax relief at all. It is just wasted.
In the past, investment advisers commonly recommended the use of insurance bonds for those people wishing to obtain an income from investments.
Technically, these are life insurance policies but in reality they are often used as a way of structuring an investment to obtain tax benefits. Withdrawals from the bond do not attract a liability to tax provided no more than five per cent of the original investment is taken out. This makes them particularly attractive to higher rate taxpayers.
A liability does arise eventually, of course, when the investment is cashed in but it is often possible to plan for that and, at worst, the tax has all been deferred.
Nevertheless, it has to be recognised that the potential liability is there and, in practice, it often falls in on death (remember that the bond is a life insurance policy of sorts).
The tax when due is Income Tax at rates of up to 40 per cent. There are also some rather nasty traps which can hit the elderly if they cash in these investments in the wrong circumstances. Certainly, it is best to take good advice on these matters.
The scene has now changed. Quite apart from the fact that the rate of CGT is now lower than the rate of Income Tax (for some it is less than half!), there is also the annual CGT exemption which is mostly unused.
I am not an investment adviser (I leave that to my colleague, Paul Dickson, and his team who specialise in wealth management) but there will, I think, be a change in the sort of advice that we will see being offered in this area.
I expect to see structured investment products which will reflect these tax changes. No doubt the key thing will be to maintain the spread of investment risks across a portfolio while enabling withdrawals to be made under CGT rules.
The tax legislation differentiates quite clearly between income and capital but for most of us it is just money.
A regular stream of capital payments feels exactly the same as a regular income. In future it looks as if the capital payments will often be more tax efficient.
Perhaps capital is the new income!
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