Rise in UK capital gains tax not all bad news for higher rate tax payers, experts point out

Written by Ray Clancy

Wednesday, 23 June 2010 08:39

The rise in Capital Gains tax to 28% for higher rate tax payers in the UK still offers investors opportunities and is a very workable change, according to experts.

By raising CGT for higher tax payers the government is trying to close off the loophole whereby higher rate tax payers are better off investing in assets that attract CGT at 18% with a personal allowance rather than pay 40% on an income generating asset

Many higher rate tax payers will be breathing a sigh of relief that it was not raised to the 40 or 50% that had been predicted. They can still take advantage of the fact that CGT is still lower than their income tax rate, according to David Doulton, director at Fair Investment Company.

‘What he has done will still do something to close the gap due to the fact that CGT for low and middle income savers will remain at 18%. This at least means that if higher rate tax payers do choose to invest in assets rather than pay 40% on an income generating asset, they will be paying more tax than a lower or middle earner paying 18% CGT and 20% income tax. And long term savers, like older people with buy to let properties used for retirement planning who are subject to CGT when the sell assets, will not be hit by the rise,’ he explained.

According to Barclays Stockbrokers, the UK’s largest online execution-only stockbroker, there are a number of options for individuals impacted by these changes. These include making full use your annual CGT exemption of £10,100, use your spouse’s exemption as transfers between married couples are not regarded as a sale of assets and so are not subject to CGT, and making maximum use of ISA and SIPP allowances.

‘Many of our clients have been looking closely at their investments ahead of this emergency Budget and crystallising gains, in the expectation that such a measure might be brought in. The rise in CGT emphasises how important it is to use those allowances available year on year and not to allow them to fall away unused. It also further increases the value of ISAs and SIPPs, as all assets held within these tax-efficient accounts are exempt from CGT,’ said Barbara-Ann King, head of investments at Barclays Stockbrokers.

According to John Lawson, head of pensions policy at Standard Life, investment bonds are incredibly useful as a tax planning tool for those paying higher rates of tax. ‘Investment bonds are now available with transparent factory-gate charges, and can hold a wide range of investment funds and cash deposits,’ he said.

The changes do, however raise some practical concerns, according to the Chartered Institute of Taxation. ‘The system will not be as simple as many people will have heard it. The basic rate taxpayer who makes a significant gain will find themselves paying the higher CGT rate on some of the gain as their combined total of income and gains exceeds the higher rate threshold,’ said John Whiting, Tax Policy Director at CIOT.

‘The immediate nature of the change does raise some practical difficulties over the use of losses and the annual exemption. It would have been better to wait for the start of the next tax year, although one can understand why immediate action was thought necessary,’ he added.

Charitable giving can offset CGT increases for higher rate tax payers, according to the Charities Aid Foundation. It points out that donations of shares, land or property are exempt from CGT and can attract income tax relief, yet according to research carried out by the Charities Aid Foundation, only a fifth of the public are aware that they can donate shares to charity, and less than a third know that they can donate land or property.