Advisors remind wealthy investors to get their post 50% tax regime strategy in place

News - Tax

Written by Ray Clancy

Wednesday, 03 March 2010 10:19

With the introduction of the new 50% tax rate in the UK looming those with taxable income exceeding £150,000 should be considering what action to take, it is claimed.

City wealth manager Saunderson House has drawn up a list of top tax tips to help investors battle against both economic uncertainty and a less predictable tax system.

Those with capital gains also need to examine their financial strategies for the new tax regime and seek an appropriate asset allocation outlook from a risk point of view, says chief executive Nick Fletcher.

He believes there will be many and varied challenges ahead in 2010 for investors. ‘With the introduction of the 50% tax rate only a short time away, those with taxable income exceeding £150,000 should be considering several actions as should those with capital gains. These should, however, only be considered in the context of an appropriate asset allocation strategy from a risk point of view and ‘the tax tail must not wag the investment dog,’ said Fletcher.

The main focus should be on spending. ‘While we have less control over personal income, we have much more control over personal expenditure. A pound spent today represents multiple pounds taken out of the future, due to the theory of compounding, therefore cutting out any unnecessary spending can be very productive. A measure of focus on your outgoings, including investment advice and management charges, is worthwhile,’ he explained.

Analysts at the firm also believe that protecting against inflation is critical to maintaining the long term purchasing power of hard earned capital. Directly held index-linked gilts are not subject to capital gains tax therefore a 5% gross gain is a 5% net gain for a low risk investment, although this excludes the coupon which is taxable.

For those wanting to increase tax efficiency in the short to medium term, where applicable, it would be sensible to consider a number of moves including the transfer non-tax sheltered income producing assets to lower rate taxed spouses/civil partners; hold higher yielding investments in tax sheltered wrappers such as ISAs or existing pension funds; position non-tax sheltered investments for capital growth; utilise remaining pension contribution allowances in 2009/10 and 2010/11 where higher rate income tax relief is available and utilise capital gains tax allowances, worth £10,100 per person, transferring assets between spouse/civil partner as necessary, the Saunderson House team recommends.

They also suggest considering crystallising gains while the tax rate remains at 18% and utilising ISA allowances which though relatively small can add up over time and can be very powerful if significant gains are made.

Other suggestions include investing in national savings and investments savings certificates, encashing single premium investment bonds with inherent gains before April 6, 2010, possibly at a lower rate than in subsequent years, as gains are taxed as income and using single premium investment bonds, subject to an appropriate level of charges, to defer investment income to subsequent tax years, if taxable income may then fall below £150,000.

For longer term tax planning it is worth considering how much capital you can gift, the team also says. And as far as mortgages are concerned it is normally preferable to repay because gross interest payments are made out of net income therefore a 5% interest rate would require a 10% gross investment return from an alternative investment to break even with the efficacy of repayment.

Also they say that liquidity is something that is often forgotten when investing as many who have invested in hedge funds have found to their cost. If and when cash is needed, it can often be expensive to release funds. It is for this reason that many illiquid products should be avoided.