How to make the most of your CGT allowance

22 March 2016
 

How to make the most of your CGT allowance

Unlike its complex and headline grabbing cousin, Income Tax, the straight-laced and perhaps lesser known tax, Capital Gains Tax (CGT) has long been a valuable earner for the Chancellor. From second homes to priceless pieces of art, investments to family heirlooms, HMRC can take a hefty slice of the gain on the sale of certain assets. Whilst this tax regime is often the cause of large tax bills landing up to 20 months later, it conversely brings with it, one of the most beneficial – and underutilised – methods of creating tax free growth for investors. But how does last week’s Budget announcement that CGT rates are to fall, impact upon investors? Gary Smith, Financial Planner at Tilney Bestinvest, delves into the impact that these changes will have.

“Before the Budget 2016, those who invest directly in stocks and shares, some collective funds such as Unit Trusts/ OEICs and Investment Trusts, would have expected to be taxed at 18% (basic rate taxpayers) or 28% (higher rate taxpayers) on any gains realised. This is very attractive compared to the Income Tax rates of 20%, 40% or 45% associated with cash based investments and gains on investment bonds. So, CGT was already an evidently tax beneficial method of achieving growth.

“Following the Budget however, no longer will the CGT administration become a part-time player in the tax regime of investments, but from this point forward, assets subject to CGT should form the bedrock of any investment portfolio. The new CGT rates of 10% (basic rate) and 20% (higher rate) were introduced in the Budget, effective from 6 April 2016. That’s a massive reduction of 8% nominal across the board and potentially thousands of pounds saved in tax. This, coupled with the first £11,100 of gains being tax free (£22,200 for couples), the benefit to investors should be clear for all to see.

So how does it compare exactly?

“Taking into account an individual who’s a higher rate taxpayer, selling an asset for a profit of £50,000, with no other gains made in the tax year and no losses to offset can be laid out as follows:-

 

2015/16

2016/17

Asset sold for

£250,000

£250,000

Less cost of asset

£200,000

£200,000

Less CGT allowance

£11,100

£11,100

Amount subject to CGT

£38,900

£38,900

Capital Gains Tax Due

£10,892

£7,780

“By simply deferring the sale until after 5th April this year, the seller can save over £3,000 in tax.

So how can the CGT regime work in financial planning?

“There are many ‘routes to market’ when investing, whether it is through investment bonds, to direct investments, Investment Trusts, shares and other specialist investment vehicles. However, where these investments are chosen to be held within ‘tax wrappers’ can have a significant effect on the tax incurred, as the table below illustrates:

 

Onshore Investment Bond

Offshore Investment Bond

Direct Investments

(2015/16)

Direct Investments (April 2016 +)

Initial Investment

£100,000

£100,000

£100,000

£100,000

Tax within wrapper*

£10,392

£0

£0

£0

Assumed value upon withdrawal**

£193,528

£207,893

£207,893

£207,893

Tax on investors

£18,706

£43,157

£23,994

£17,138

Net withdrawal

£174,822

£164,736

£183,899

£190,755

*Assumed no income or dividends throughout term, for ease of comparison

**Taking into account 15 year term at 5% annual growth – for illustration purposes as investments can go both down and up

“Take for example a couple, who are higher rate taxpayers at the time of investment and encashment, by holding the investments in an offshore investment bond it would have experienced almost tax free growth throughout the investment period. However, upon withdrawal, the gain would be subject to tax of 40%, resulting in just under £165,000 in the pockets of the investors.

“If the £100,000 had been invested in an onshore investment bond, owing to effectively basic rates of tax being applied within the bond, it is likely the fund would not have reached the same value as the offshore version. However, assuming the fund had grown to £193,528 upon surrender, a further £18,706 in tax would be due, the final amount that would be received would be a total of £174,822.

“Already, the current CGT regime provided an effective alternative due to the use of each of their CGT allowances (2 x £11,100), and taxation rates of 28% on the gain rather than effective 40% on the bonds. However, on account of the newly introduced CGT rate of 20% for higher rate taxpayers, our couple would be significantly better off…

“Admittedly, there are many other factors to take into account such as portfolio composition (the example above simply assumes capital growth only and no income / dividends throughout), income taken / reinvested, along with many more variables. All of which could effect maturity values and total tax payable, but the difference is plain to see and the potential savings in tax, massive…

“The benefits are even clearer to see when you consider the fact that through sound financial planning or investment management, CGT allowances (at present £11,100 each) could be used each year to potentially completely mitigate tax on growth within this portfolio. The portfolio may produce taxable income and dividends throughout the term of the investment, but again, these could potentially completely offset by the new dividend and savings allowance. It truly is the investment of choice.

A benefit for all?

“It is not just individuals that can enjoy the fruits of the new regime. Trustees and Legal Personal Representatives can also benefit, which, despite the present restrictions on available CGT allowances, mean more in the pockets of the beneficiaries.

“Not all are dancing in the streets though; the charge on residential property remains effectively the same, leaving landlords, property developers and second home owners simply left out in the cold again.

‘But I’ve just sold my assets and incurred a huge CGT bill’, you say!

“Well, there may be a way to recover what you’ve paid. In certain circumstances, consideration could be given to investing in Enterprise Investment Schemes (EIS), to benefit from CGT deferral. By investing the whole amount of the gain into an EIS, a claim can be made to defer the assessment of any gain made in the previous 36 months, until after the EIS shares have been disposed of – a time when the rates should be at the lower rates of 10% and 20%. If you’ve already paid the tax, it can be reclaimed and simply paid at a lower rate in the future. EIS however, are high risk investments and financial advice should always be sought in relation to their suitability.

“All in all, the new Capital Gains Tax rates should be regaled but it is imperative that the opportunities are grabbed with both hands, otherwise simply resting on laurels could result in thousands of pounds in unnecessary tax being paid. With good financial planning - tax free income, dividends and growth awaits!”

To discuss the Budget or any other financial planning topic please contact Gary Smith on 0191 269 9971 / gary.smith@tilneybestinvest.co.uk

- ENDS -

Important Information:

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This press release does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers.

Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. Please note we do not provide tax advice.

EIS investments should be regarded as higher risk investments. They are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than 3 years. Owing to the nature of their underlying assets, EIS investments are highly illiquid. Investors should be aware that they may have difficulty, or be unable to realise their shares at levels close to that that reflect the value of the underlying assets. Tax levels and reliefs may change and the availability of tax reliefs will depend on individual circumstances.

The above article is based on our interpretation of the Budget 2016 and related legislation; it is not intended as advice, and the impact of any changes to tax rates or allowances will depend on your personal circumstances.

Press contacts:

Jason Hollands
0207 189 9919 / 07768 661382
jason.hollands@tilneybestinvest.co.uk

Gillian Kyle
0203 818 6846 / 07989 650 604
gillian.kyle@tilneybestinvest.co.uk

About Tilney Bestinvest

Tilney Bestinvest is a leading investment and financial planning firm that builds on a heritage of more than 150 years. We look after more than £9 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.

We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.

We have won numerous awards including Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.

Headquartered in Mayfair, London, Tilney Bestinvest employs over 400 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.

The Tilney Bestinvest Group of Companies comprises the firms Bestinvest (Brokers) Ltd (Reg. No. 2830297), Tilney Investment Management (Reg. No. 02010520), Bestinvest (Consultants) Ltd (Reg. No. 1550116) and HW Financial Services Ltd (Reg. No. 02030706) all of which are authorised and regulated by the Financial Conduct Authority. Registered office: 6 Chesterfield Gardens, Mayfair, W1J 5BQ.

For further information, please visit: www.tilneybestinvest.co.uk

About Tilney

Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years.  Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.

We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the YourMoney.com Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.

Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.