Ministers do little for investors

Mar 19 2008 By The Journal

GORDON Brown and Alistair Darling have provided precious few opportunities as Chancellors of the Exchequer for investors in property or shares to limit their taxation liability.

Recent budgets have heralded an assault on our pockets with resulting direct and indirect increases in income tax, in inheritance tax, and right now in capital gains tax (CGT).

The CGT changes are dramatic and include the abolition of two valuable reliefs; indexation allowance and taper relief, and the introduction of a flat tax rate of 18%.

There is also a special rate of 10% on the first £1m of certain gains called entrepreneurs’ relief but it is unlikely to be relevant to most property investments and listed stocks and shares.

Indexation allowance was introduced in 1982 and applied until 1998 when it was frozen and taper relief introduced. Indexation allowance is basically relief for inflation and is based on changes to the retail price index.

Taper relief applies as a straight percentage reduction to any gain, after all other reliefs.

The rate depends upon two things, the type of asset (business or non business) and the length of time held. For most investment properties and stocks and shares, the maximum relief is 40%, obtained after 10 years of ownership, giving a 24% effective tax rate for 40% tax payers.

Long term holders of investment property or stocks and shares do have a window of opportunity leading up to April 5, to review their investments, and to access both the indexation allowance and the 18% tax rate i.e. picking the best of the old and new regimes.

It is easier to explain these reliefs with an example.

Suppose you bought shares worth £50,000 in 1982 and sold them today for £200,000.

You would have a profit of £150,000, but when indexation is applied you are treated as if you had bought the shares for £102,000. This reduces the taxable gain to £98,000.

Because of taper relief, a higher rate tax payer would pay an effective rate of tax of 24% on the £98,000 gain, or £23,520 if he or she sold before April 5, ignoring annual allowances.

The tax bill would jump to £27,000 if the sale took place after that date as indexation and taper relief are removed and replaced by a flat 18% tax rate on the full £150,000 gain.

There is however, a win win strategy. You can pass your assets tax free to your spouse or civil partner to lock in the benefit of indexation.

In the above example, as long as the transfer took place before April 5, 2008, the value of the shares when your spouse received them would be £50,000 plus the indexation allowance – in other words, he or she would be assumed to have acquired them for £102,000.

If your spouse sold the shares for £200,000 in May 2008, the taxable gain would be £98,000.

He or she would pay tax on this at the 18% rate, a bill of £17,640 against £27,000 if no action was taken.

Note that this is even better than the £23,520 which would have been paid if the sale took place before April 5.

There are ways of locking in the taper relief other than by a gift to a spouse or civil partner and we would be pleased to provide details of these.

Frankly, however, it is likely that a new approach to investment may appeal post April 6.

The Financial Planning Team within the Dickinson Dees Wealth Management department offers a Portfolio Management Service which provides access to a range of professionally managed collective investments. The service provides access to funds that meet strict investment criteria with some savings on investment costs, and which may eliminate future buying and selling costs reducing the number of transactions where CGT could be payable.

Sounds too good to be true? Well, it isn’t. The firm not only deals with tax challenges on request, but is happy to work with regional or national accountants and brokers to help investors arrive at a balanced and tax efficient investment plan suitable to the needs of the individual. Tel: (0191) 279-9651.

www.dickinson-dees.com