Friday, 8 January 2010

Tax Rises – beat the inevitable!

A very Happy New Year to anyone who reads my blog. I wish you all a healthy and prosperous 2010.

With the current state of the Public Purse we see constant veiled references to ‘savings, economies and efficiencies’ within Government spending that offer the opportunity to improve the situation. Whilst it is undoubtedly true that there must remain huge inefficiencies within such a huge beast as UK plc, no degree of corner-cutting is going to make enough of a difference for us. ‘Cuts’ remains the one word that nobody wants to utter, but it is only a matter of time before it re-enters the vocabulary, after which point the debate will quickly become over how much and where such cuts can be made.

Cuts alone though will not get us out of the hole that we have collectively dug. Thus, Tax has to be the one area where the greatest difference can be found. In a growing economy, tax receipts would be expected to rise as the money circulates swiftly and productively from each of us to the other. Even the most optimistic of pundits reckon on there being a fairly long slog before we return to that kind of environment and with a flat or shrinking economy, we need to wise up to the inevitability of tax rises. Some no doubt will be stealthy, some more direct, but taxes must rise as part of our rehabilitation program.

Scanning the tax system for an obvious target leads me to Capital Gains Tax, the tax that we pay on profits when we sell assets such as shares, second homes and the like. Capital Gains Tax (CGT) always used to be paid at the individual’s highest rate, until recently 40% after various allowances for inflation and so on. In April 2008 this rate was reduced to 18% across the board, regardless of income or wealth of the individual concerned. Thus, at a stroke, the likely tax bill on a £1,000 gain for a higher rate taxpayer was reduced from £400 to £180. This has since been exaggerated all the more with the introduction of the 50% Income Tax bracket.

According to HM Treasury, every 1% by which the CGT rate rises would raise a further £120 Million of revenue for them. It has to be said therefore that the current 18% flat rate for CGT looks very vulnerable indeed and I would say that it is only a matter of time before the anomaly is corrected.

Where is the Opportunity?

CGT is chargeable on the difference between the purchase price of an asset and that at which it is sold. £10,100 of the resulting gains are free if tax with the rest being chargeable at the prevailing CGT rate. As we have said, the rate is subject to change, but so too is the threshold above which the tax is paid. Historically the current £10,100 tax-free gain amount is the result of occasional incremental increases, but there is nothing to stop this process being reversed. As we know, a Chancellor desperate for revenue can and probably will look anywhere for what he needs.

If a rise to the rate of CGT is indeed going to happen, then an opportunity is created for investors to ‘crystallise’ gains now and get the proceeds sheltered into ISA or Pension funds depending upon their objectives, where CGT will no longer be an issue.

If ISA’s have already been fully used for the year then it is still possible to crystallise the gains and reset the ‘base cost’ for the investments to the current value. Changes to the law mean that investors cannot simply reinvest in the same stock as before, but there is a whole universe of funds and stocks out there from which to choose.

Above all, the message should be not to wait for the axe to fall and close off these areas of opportunity but to sit down with an appropriate Adviser and see if the current situation offers you some scope for advantage.

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