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Capital Gains Tax - How Mr Darling's big idea could affect you

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A surprise move and one that has already brought a firestorm of criticism down on the Chancellor's head from a united front of business lobbyists - the proposed changes to Capital Gains Tax (CGT) announced in Pre Budget Report 2007 have widespread implications for you and for your investments.

The proposals, on paper, appear simple enough and, indeed, simplify an existing over-complex set of arrangements. Assuming that the Chancellor is not forced into any kind of change to or dilution of his proposals, this is what the Capital Gains Tax regime will look like on the morning of 6 April 2008:

  • Taper relief and indexation allowance for CGT will be abolished; and
  • Individuals will be changed a flat rate of 18% on CGT disposals.

So far, so simple and so what? Any capital gains you make will continue to be measured against your nil rate annual allowance for capital gains (currently £9,200 for 2007 / 08).

You don't have to like tax but you do have to pay it. But are you paying too much? See if Moneyextra's Tax Centre can help tackle your tax bill.

Any gains above your annual allowance will be taxed at 18% (good news for higher rate taxpayers, bad for nil and basic rate taxpayers if the investment has been held for five years or more). There will, in future, be no advantage to holding an investment for a longer period (i.e. no taper relief).

What you could do to reduce CGT

  • Utilise your Individual Savings Account (ISA) allowance within your portfolio on an annual basis to reduce any Capital Gains Tax liability - investments held within ISAs are not liable for CGT.
  • Manage your annual CGT allowance to make sure it is utilised each year (you should be doing this anyway).
  • Reduce any tax bill on dividends and income from investments by the use of accumulation units. Income generation may not be tax efficient outside PEP / ISA wrappers.

    • Plan a sound financial future right now with our cutting edge online financial planner

    What you should be considering NOW

    Currently the plans are only proposed changes to the CGT regime and are, therefore, potentially subject to change before Budget 2008 in March next year. It is possible that there may be further changes to tax legislation, perhaps including changes to the taxation of life assurance bonds in an effort to appease the life industry.

    As the proposed changes to Capital Gains Tax are planned to come into effect from 6 April 2008, there are opportunities to be considered NOW around tax planning for nil and basic rate taxpayers who will be able to use any taper relief available on investments before this relief is abolished. Attention needs to be paid to any current tax allowances (including taper relief) and any penalties that may be included for encashment of any investments.

    You should take independent financial advice before making any decisions, especially where trust arrangements are involved.

    Assuming the changes that are proposed do take place, the case for direct investments to utilise personal CGT allowances remains strong. The new CGT regime would also generally make direct investments more attractive from a higher rate tax perspective.

    Do you need unbiased independent financial advice? Why not give us a call?

    Post Budget 2008 Tax Scenarios

    Non Taxpayer

  • Internal taxation at 20% for onshore bonds
  • CGT payable at a flat rate of 18% on all gains over the personal allowance for direct investments
  • ISA allowances can be used on an annual basis for direct investments
  • No taxation for offshore bonds unless any gain pushes clients into other tax brackets.

    • Basic Rate Taxpayer

  • Internal taxation at 20% for onshore bonds
  • Gains subject to further tax at 18% if top slicing puts client into the higher rate tax paying bracket for onshore bonds
  • CGT payable at a flat rate of 18% on all gains over the personal allowance for direct investments
  • Dividend income subject to 10% tax, interest from fixed interest investments subject to 20% income tax for direct investments outside of PEP / ISA
  • ISA allowances can easily be used on an annual basis for direct investments
  • Gross roll up available on offshore bonds pay tax at marginal rate on gains at any chargeable event with relief for any periods where the client was non resident in the UK

    • Higher Rate Taxpayer

  • Internal taxation at 20% for onshore bonds
  • Gains subject to further tax at 18% for onshore bonds
  • CGT payable at a flat rate of 18% on all gains over the personal allowance for direct investments
  • Dividend income subject to 32.5% tax, interest from fixed interest investments subject to 40% income tax for direct investments outside of PEP / ISA
  • ISA allowances can be used on an annual basis for direct investments
  • Gross roll up available on offshore bonds - pay tax at marginal rate on gains at any chargeable event with relief for any periods where the client was non resident in the UK

    • 29 October 2007 © Moneyextra.com

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