Investors are nervously awaiting the government’s emergency budget on 22 June. That’s because they’re likely to be among its main targets – particularly if they’ve been successful. Capital-gains tax (CGT) is levied on the profit you make when you sell what HMRC calls a ‘chargeable asset’. Typically, this excludes assets such as your main home, gilts and small items. But it catches any other properties you may own, plus shares. Currently, you pay a flat 18% tax on any gain, after the annual allowance of £10,100. That’s low compared to income tax rates, which can now hit 50% for top earners. But that’s about to change.
We don’t yet know exactly how. But the LibCons are likely to ditch the 18% rate. HMRC may even return to levying the tax at an individual’s highest marginal rate of income tax. So if your income-tax bracket is 40%, you’ll pay CGT at 40% too. Also, the tax-free annual allowance may be cut. On top of that, the LibCons haven’t said whether or not they’ll reinstate indexation allowances or taper relief, which shrink the size of any gain to reflect inflation.
So what should investors do? Don’t panic, says Simon Leeney of Cripps Law. Dumping buy-to-let properties and shares to avoid a tax change that’s yet to be confirmed isn’t wise. And if the rules take effect from 22 June (which they may) you have just three weeks to get organised – not much time to sell a house. Given that fees for arranging tax-avoidance schemes can hit £5,000 or more, Leeney reckons only those with potential liabilities over £50,000 should act.
So for most people there’s little point in rushing to sell while the law remains unclear. Better to ensure your basic tax housekeeping (which you should be doing anyway) is in order. First, ensure you’re using your individual savings allowance (Isa). Any gains made within an Isa wrapper are CGT-free and you can shelter up to £10,200 per person a year. Next, keep a record of any losses incurred on share sales. These can be used to cut future gains (and hence the tax you pay). If you’re in a couple, another sensible step is to split ownership of assets so you benefit from two sets of allowances. If one of you earns little or no income, you’ll also benefit from the lower marginal income-tax rate on any subsequent sale that breaches the allowance levels.
There are other ways to avoid or cut a CGT liability, but they have risks. Gifts are an option. A father could gift a holiday home to a son, say, and pay CGT of just 18% of any profit to date. But be careful, says Leeney. Should the father die within seven years, a 40% inheritance-tax liability will be due. Then there are tax-efficient investment vehicles, such as enterprise investment schemes (EIS).
Here you can take 20% income-tax relief on an investment of up to £500,000, then roll over any capital gain if you hold
the investment for at least three years.
But watch out – the underlying investments are high risk (usually unquoted firms) and once the EIS is eventually sold, CGT becomes payable.