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

The Sunday Telegraph - Money & Business - - Front page -

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.”

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