Inflation – a thing of the past? Maybe not. The jury’s out but many will not rule out a gradual and meaningful increase. Inflation has remained stubbornly above the 2 per cent target.
Despite subdued pay growth, weak productivity has meant no corresponding fall in domestic cost pressures. And increases in university tuition fees and domestic energy bills have added to inflation more recently. Many economists expect consumer price index inflation to rise further in the near term and perhaps to remain above the 2 per cent target for the next two years.
So what does this mean for tax planners? Let’s assume that the tax planner is also a financial planner. The reverse will inevitably be true. These days you cannot really do good financial planning and ignore tax.
Tax is pretty big news. Big news for everybody as it is on the front page pretty regularly. And, unfortunately for him, when the newspaper is short of a picture to accompany an article on aggressive tax avoidance, Jimmy Carr seems a prime candidate. The one with him with his finger pressed against his lips. Jimmy Carr. Aggressive? Come on! Now, Moylesy, that’s another story. Anyway, so we all accept that tax planning is an important part of the financial planning process. Right?
So, if we had a bit of that inflation, what would we need to factor into our tax planning to ensure we can achieve a good outcome for the client? Those of us lucky enough to generate some capital growth in our investment portfolios might become aware of how unfortunate it is that the indexation allowance and even taper relief are no longer available. From April 1998 indexation allowance was frozen (except for companies) and replaced with taper relief. Then, from April 2008, both indexation allowance and taper relief were abolished.
After remaining frozen at £10,600 in 2012/13, the annual exempt amount has at least increased to £10,900 for 2013/4. Over time, the lack of indexation allowance and, of course, taper relief can have a pretty big impact.
Simply put, if the capital value of your investment increases by the rate of inflation then its real value, self-evidently, has remained static. Not so good. Add to that the reduction of the increase by 18 per cent, or more likely 28 per cent, and it looks grim.
Granted, the annual exemption may take care of some or even all of the gain. However, on reasonably substantial investments, it will be important to use the exemption each year to maximise its value through effectively uplifting the base or acquisition value of the investment. The annual exemption cannot be carried forward if it is not used in a year. And, of course, you need to avoid falling foul of the “bed and breakfast” provisions if you want an annual strategy of using your annual exemption to work. This is especially important as most of these strategies (as if sponsored by Dreams or Bedworld) have a bed involved in them.
If you leave it all until the end, so to speak, and measure the gain from the original acquisition cost, the chances of having a big (taxable) gain to deal with (subject to market volatility etc) increase. And this could mean that on bigger portfolios the annual exempt amount is exceeded.
As referred to above, it will be important to carefully consider the anti-avoidance rules relating to disposals and reacquisitions by the same taxpayer (the “anti bed and breakfast” rules) when considering the annual use of the annual CGT exemption.
The ability to “bed and breakfast” assets – selling an investment then buying it back again pretty much immediately to crystallise gains or losses (without investment risk) and rebase the purchase price – has not been possible since April 1998.
Broadly speaking, to ensure the effective realisation of gains, the disposer of an asset must not personally reacquire the same asset within 30 days of disposal.
In light of this prohibition though, a number of other “bed-based” strategies have been developed. With a “bed and Isa” transaction, an individual sells the asset then buys it back immediately within the Isa wrapper tax-free by way of a subscription. A “bed and Sipp” transaction involves selling the investment then using the proceeds to make a contribution to a Sipp wrapper. With a “bed and spouse” arrangement, an individual sells assets and then their spouse buys back the same assets in their own name.
Given that these strategies all appear to incorporate real commercial steps with tax outcomes that are balanced with the commercial outcomes, one would hope that they are not at risk of attack under the impending General Anti-Abuse Rule that will become operative on the date of Royal Assent to the Finance (No.2) Bill this summer.
Tony Wickenden is joint managing director at Technical Connection
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