The Government has called an emergency Budget on June 22. Is there anything I can do to protect my assets from any changes that may be announced?
We all know there was a pre-election promise that the Government would try to quickly reduce UK public sector borrowing, which stands at £156bn for the year. It makes sense, therefore, to plan for any changes to your holdings to take place before the Budget date.
The Chancellor has said the reform of capital gains tax is unavoidable because of the “enormous amount of income shifting” by people preferring to pay the current 18 per cent capital gains tax on investments and assets rather than higher rate 40 per cent or 50 per cent income tax.
I expect CGT to rise to 40 per cent or even 50 per cent on non-business assets to take away the different numbers in the application of capital gains tax and income tax.
For every 1 per cent rise in the CGT rate, HMRC will raise £120m and this will help fund the increase in the personal allowance for those who are less well-off.
It is likely there will be announcements in the Budget of generous exemptions for entrepreneurial businesses as the economy needs to deliver improved GDP data.
There is far more to financial planning than simply tax planning and the correct selection of tax-efficient products is where the expertise of an IFA really adds value
What I will do for you is calculate potential capital gains tax payable on any disposal you may make, check that any reliefs – entrepreneur, rollover, reinvestment, principal private residence and gift – are fully utilised. I will also ensure you and your spouse are both maximising your exemptions and this may mean you transfer some assets to your wife. We have previously talked about making sizeable gifts to your grandchildren and I will guide you through CGT implications and we can look at suitable trust wordings to offer further tax savings.
Setting up a family trust is sensible as the tax on creation is calculated as at the current market value of the assets. That means you will pay tax at just 18 per cent (or 10 per cent) on all gains to date. The investments earmarked for your family held in the trust will only have future gains taxed at the new, most likely higher CGT rates.
As a continual higher-rate taxpayer, I encourage you to consider moving assets across into investments that are exempt from capital gains tax.
The tax efficiency of life-assurance products such as maximum investment plans and investment bonds can no longer be ignored.
If CGT does increase to 40 per cent or above, these products become more attractive, especially as we are planning to drop your income in retirement to be taxed at the basic rate and you tend to always use your annual CGT exemption.
There is far more to financial planning than simply tax planning and the correct selection of tax-efficient products is where the expertise of an IFA really adds value.
As in all tax planning, the timing of the disposals is important and while you may wish to rebalance your portfolio while markets are uncertain we can use the current CGT exemption of you and your wife so that £20,200 of gains can be taken between you free of CGT. Even if you are likely to dispose of a higher amount, the current rate of 18 per cent will not be too punitive.
Kim North is director of Technology & Technical