Reasons to take a hit on capital gains tax ahead of the Budget
No one goes out of their way to trigger a tax bill but the approaching Budget means it could make sense, writes Harry Brennan
Wealth advisers are telling their clients to review their portfolios and consider selling off assets in anticipation of a potential increase in capital gains tax (CGT) in the forthcoming Budget.
Some are concerned that historically low rates of CGT are ripe for review as the Government seeks extra sources of funding for public services such as the NHS.
James Hambro, a wealth advice firm, has written to customers with long-standing investments “pregnant with gains” following years of growth to urge them to weigh up the possibility of taking a tax hit now while rates are low or risk paying higher rates later. They are also concerned that people’s reluctance to pay CGT, often deemed a “voluntary tax”, could make their portfolios unbalanced and hence more risky.
Higher-rate taxpayers, those who earn more than £46,350, will pay 28pc on capital gains from residential property and 20pc on gains from other assets. Those with more modest incomes would pay 18pc on property gains and 10pc on other assets if their income and any gains made added up to less than the higher-rate tax threshold, thus keeping them in the basic-rate tax band.
The first £11,700 of capital gains in the current tax year is tax free.
Since CGT was introduced in the Sixties, few chancellors have been able to resist making changes to rates. Charles Calkin, of James Hambro, said CGT could be brought into line with income tax, as under Margaret Thatcher in the late Eighties. “For higher-rate and additional-rate taxpayers that could mean a rise from 20pc to at least 40pc. This is a good time for investors to at least review their portfolios,” he said.
Edward Park, of Brooks Macdonald, another wealth manager, also advised investors to consider their options. The company has used the forthcoming Budget as a reason to prompt its customers, but said it expected CGT to be subject to review at some point, even if not by the current government.
Mr Park said there was an investment case for selling certain assets and accepting a tax bill as a result. He pointed out that after the long bull market, most prominently in America, many investors would have made significant gains. Others will be sitting on “cherished shares” that have been “part of the family for years”. Failing to sell such assets and rebalance the portfolio runs the risk of excessive concentration in particular stocks, resulting in a loss of diversification, he said.
He added that a market downturn could wipe out recent gains and some investors could lose more than they would have if they had sold their investments earlier, even at the cost of a tax bill.
For some wealthy individuals whose personal allowance does not cover all their earnings from income investments, Mr Park said CGT was preferable to income tax. By selling shares instead of taking dividends, income investors can pay CGT rather than income tax, which is charged at 45pc for those who pay the additional rate.
However, Mr Park stressed that some investors, such as the elderly, should not expose themselves to the taxman in this way.
When you die, CGT dies with you and there is no charge on any increase in the value of any assets. The person who inherits the assets is treated as if they had paid market value on the date of death.
Danby Bloch, of Helm Godfrey, a financial planner, said that thanks to the relatively generous annual allowance most people would not need to worry about CGT. He said he doubted that the tax would be increased, although he did not rule it out.
To those who delay rebalancing their portfolio for fear of being taxed, he said “the tax tail should not wag the investment dog”.
“A few investors are put off switching out of investments because they don’t want to pay the CGT. If they have a serious overexposure to a particular sector or share, that’s almost certainly a mistake,” he added.
For people who are in this position Mr Calkin suggested three ways
to reduce the CGT bill. If you share your assets with a spouse or civil partner you can double your annual exempt allowance to £23,400. If your partner is a basic-rate taxpayer or pays no tax at all you could give them more to dispose of, but be careful not to give them so much that they are pushed into a higher tax bracket.
Giving investments to a charity to dispose of in place of cash donations could also be an option. Charities are exempt from CGT, so you could reclaim a significant chunk of your donation via your tax return while the charity enjoys the full amount.
Another option is to stagger disposals over a number of years, taking smaller tax hits until the portfolio is rebalanced. You could also treat the cash raised as income. This would incur less tax than taking dividends, which would be taxed at a higher rate.
“It is understandable if clients prefer to sit on historic assets pregnant with gains rather than dispose of them and trigger a tax bill,” Mr Calkin said. “But it is dangerous to let tax avoidance dominate your investment strategy.”