View more on these topics

The wolf at the door

It is one of the Inland Revenue&#39s best kept secrets – fewer than 0.2 per cent of the British public use up their capital gains tax allowance each year.

With so many people sitting on unused allowances, there is a great opportunity for IFAs to enhance returns for their clients.

We are given three taxation allowances. First, there is the personal tax allowance – this is an allowance given to every individual automatically and, provided that you earn income, it is also used automatically. We have no control over this.

Then there is the Isa allowance of up to £7,000. Isas have quickly proved popular and, with more than one million people deciding to invest in an Isa last year, it would seem that people are keen to take advantage of the tax breaks they offer.

The third tax allowance is the CGT allowance which is currently £7,200 a year – it is likely that will increase in line with inflation in the March Budget. It is vital that the CGT allowance is not pushed into the background although there are fears it is being ignored in some quarters.

Perhaps many think it is the preserve of the rich but, of course, this not the case. It may be that investors need time in getting used to new concepts. When Peps were launched in the late 1980s, they took time to become popular with the masses and there is perhaps a similarity with CGT.

But there are many ways for IFAs to take advantage of the CGT allowance. Investments that carry tax breaks include Isas, gilts, pensions, endowments, enterprise investment schemes and venture capital trusts.

There have always been ways to take capital from collective vehicles to make the most of the CGT allowance and offer clients with a tax-free return. However, this is not an automated process, it creates paperwork and takes up a lot of time.

For many years, therefore, IFAs have used insurance bonds as a simple way of generating this “income” for their clients rather than utilising the annual CGT allowance.

Take offshore bonds, for example. Regulations enable investors to draw down 5 per cent of their original investment on a tax-deferred basis for up to 20 years or when the bond is finally cashed. On encashment, the realisable gains are charged at the investor&#39s marginal rate of tax as if it were part of his taxable income.

But today, income planning is proving more and more difficult. The low interest rate environment, falling dividends and gilt yields and the demise of the welfare state is putting a strain on people looking to supplement their income. The question is how can the increased need for income be satisfied in a tax-efficient manner.

Our quest to resolve the question led to the development of Blue. The fund allows investors to withdraw the maximum amount they can each month with the lowest risk attached. It is designed as an effective vehicle for any taxpayer who is not using their CGT allowance. The advantages become more marked for higher-rate taxpayers.

To get an annual income of about 5 per cent, a higher-rate taxpayer would need to be earning about 8.5 per cent gross, which requires a relatively high degree of risk-taking. This solution, on the other hand, only needs to generate a yield of 5 to 5.5 per cent to allow investors to withdraw 5 per cent of the fund each year without the original investment being affected.

While making the most of the client&#39s CGT allowance is important, there are other ways to escape the CGT net altogether.

Gifts are exempt from CGT. If the client is likely to breach the exempt amount but their spouse or children are not, then they have the option of transferring assets to them because transfers to spouses are tax-free.

Unfortunately, the good old days of bed and breakfasting – where you sold shares on April 5 and bought them back the next day to realise a gain – are now largely over. Nevertheless, if your client is married, there is the other tactic of “bed and spousing”. This is another way of realising gains on investments annually to avoid a big tax bill later. It means selling one partner&#39s assets on April 5, realising a small gain within or close to their CGT-exempt amount and then the other partner buying the same shares back on April 6.

VCTs are also proving very popular among investors looking to avoid being penalised on capital gains. The market is booming. It may have only started in 1995 but already more than £1bn has been raised through around 50 trusts. Investors can defer up to £100,000 of CGT by reinvesting capital gains in a VCT. Enterprise investment schemes, although thin on the ground at present, allow investors to defer unlimited amounts for CGT purposes.


Legal & General – Performance Bond Isa

Tuesday, 20th February 2001.Type: Capital protected mini or maxi Isa.Aim: Growth and income linked to the FTSE 100 index.Minimum-maximum investment: £1,000-£7,000.Investment choice: 100 per cent linked to the FTSE 100.Term: 5 years.Guarantee: Capital returned in full at end of term provided the FTSE 100 index at any time in the last three months is not […]

Shell tops green business tables

Shell has topped the Business in the Environment table of environmentally responsible companies.Shell heads the 184 FTSE companies and other global businesses committed to the annual Index of Corporate Environmental Engagement, followed by Scottish Power, British Energy, Severn Trent and J Sainsbury.The index compares companies against each other on the basis of their strategic environmental […]

Pet shop ploys

The end of the financial year is looming and this is a good opportunity for advisers to help clients consider what tax planning activities should be undertaken before April 6. The first type of planning to be considered is income tax planning. Given the level of advertising across almost every type of media, it would […]

Legal & General – Secure Bond Isa

Wednesday, 21st February 2001.Type: Capital guaranteed mini or maxi Isa.Aim: Growth and income by investing in Dublin listed shares.Minimum-maximum investment: £1,000-£7,000.Investment choice: 100 per cent in Dublin listed shares.Term: 5 years.Guarantee: Capital returned in full at end of term regardless of performance of underlying investment.Return: Capital returned in full along with either 5 per cent […]

Inheritance Tax, a tax on the wealthy? Urban myth or fact?

By Kim Jarvis, Technical Manager with Canada Life’s ican Technical Services Team. Inheritance tax has been around in some form since 1796. Estate duty dates back to 1894 and over the years this tax has evolved into the inheritance tax (IHT) we know and love today, which was introduced in 1986 as a replacement for […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm