Double your money!
On 12 November the Government announced that they were seriously looking at a massive increase in Capital Gains Taxation.
It comes as a result of Chancellor Rishi Sunak exploring new ways to raise revenue, in order to cover the cost of the Covid-19 pandemic. Given that the public realise that we need to replace the money being spent fighting the pandemic and supporting businesses and individuals, it seems certain that there will be tax rises. With a Government commissioned report estimating that around £14 billion could be found if they doubled the rate of Capital Gains tax.
It’s always serious when the Government spends money on it
The Government has already asked The Office of Tax Simplification (OTS) for a fast-track of its review regarding Capital gains Tax (CGT). I would suggest that it’s worth pondering why the Government would require such a large report to be produced at speed, unless there was a real and pressing requirement for it.
The changes that the OTS has recommended are aligning CGT with Income Tax and slashing the current £12,300 exemption down to just £2,000.
Now I’m not saying that these changes are absolutely on their way, but it does seem extremely likely that change is coming.
You can’t stop it, but you can get ready for the impact
Most financial experts recognise that there is a gaping and growing hole in the country’s finances. Albeit as a result of Covid-19, it still has to be plugged; and quick tax rises seem to be one strategy that The Chancellor is advocating. So now is the time to take stock of your current position and to plan for tomorrow.
Look to the future with a boost from today
The best way of reducing any potential impact that a rise in CGT will have, is to use your current exceptions whilst they are still available to you.
If you have sufficient ISA or pension relief, then you could choose to reinvest in a tax free ISA, with up to £20,000 allowance all of which can be in cash, stocks and shares, or a combination of both. Or you could look to top up your pension. Your tax-free allowance means that a £20,000 new contribution instantly translates to a £25,000 gross contribution, with higher rate taxpayers seeing an increase to a £30,000 gross contribution.
Stock-up on existing losses
If your investment portfolio has losses within it, you could sell the loss making stocks in order to crystallise those losses and offset them against future gains. When calculating your CGT bill, you are allowed to offset any capital losses against any gains, which means that a gain of £50,000 with a loss of £20,000 produces a bill of £30,000.
Plus, in most calculations, you can offset losses for the past four years against current gains.
How about some bed hopping? I’m being serious!
Transferring assets between you and your spouse, or civil partner, means that they are exempt of CGT. So moving assets around means that you can take advantage of the tax-free allowance of £24,600.
Another way of minimising CGT is by one spouse or civil partner selling an asset to realise a gain, whilst the other partner buys them back. Known as the ‘Bed and Spouse’ technique, where one spouse sells some shares to a broker, the other buys them back at the same time from the same broker. However, it’s important to note that good record keeping is required and any acquired asset or cash proceeds should not pass back between spouses.
You can also ‘Bed and ISA’. This entails you selling investment funds or shares that produce a capital gain, then immediately buying the same assets back inside an ISA. That way you can directly sell £20,000 of assets and use the proceeds to fund an identical purchase (excluding the sales charges) inside an ISA, which will be free of CGT and income tax on capital gains and income.
Another viable sell and buyback technique is a ‘Bed and SIPP’. Where you buy back the asset under the tax-free umbrella of your Self Invested Personal Pension (SIPP). With all future income gains made within the SIPP being tax-free.
Options, options, options
Depending upon your own circumstances and your appetite for different investment and asset maintenance strategies, there are all sorts of ways that smart planning now can help eliminate big CGT payments further down the line.
You can, for example, invest in small companies through Venture Capital Trust (VCT) and Enterprise Investment Schemes (EIS). However both are risky and are possibly best left to experienced investors, or television’s dragons, all of whom have a real aptitude for this market.
Or you could simply reduce your taxable income. As the rate of CGT is directly linked to the rate of Income tax you pay. So lowering your taxable income for a year could lower your CGT rate from 20% to 10%, or 28% to 18% if you’re disposing of residential property.
Play the game, but play by the rules
It’s the job of every financial adviser to help clients reduce their tax bills where legally allowed. This tax planning is a constantly changing game of cat and mouse with HMRC. However there is one thing that both sides agree upon; and that’s not paying tax (tax avoidance) is never a wise course of action. So please make sure that you do declare everything to HMRC, as defrauding the taxman really isn’t worth the large fines, or worse.
As always, if you have any questions regarding current CGT or possible changes to CGT that could impact upon you, or if you have any questions regarding any aspect of your finances, then please don’t hesitate to contact one of our team at Bridgewater Financial Services; where one of our independent experts will be on hand to help in any way.