HIGH-EARNING investors are rushing to sell off assets that will attract Capital Gains Tax (CGT) before next month’s emergency Budget due to indications that CGT rates could shoot up from 18 per cent to as much as 50 per cent.
Gains on non-business assets now look set to be taxed in line – or close to – income tax bands at 20 per cent, 40 per cent and 50 per cent, prompting six in 10 of the financial advisers who responded to a recent survey to start planning ways to distance their clients from assets that attract CGT. The move is fuelling fears that London’s attractiveness will be further damaged.
But is the panic selling justified? The main reason so many investors are clamouring to crystallise their gains now is that they fear the change will be launched with immediate effect. But while the new coalition government has made it clear that CGT increases are one way it plans to tackle the current budget deficit, no one really knows exactly what is going to happen, or when.
At this point, all the government has said is that it will seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with “generous exemptions” for entrepreneurial business activities.
Its definition of non-business assets, together with confirmation that the annual exemption will remain at £10,100 (rather than plunging to £2,000 as the Liberal Democrats believed it should), are yet to come. And this information is unlikely to surface until the Budget on 22 June, potentially also the first day of the new CGT regime.
Mike Warburton of accountant Grant Thornton does not believe that the new rates will come in next month. He said: "Historically, a CGT change has never come in halfway through a tax year, so my guess is that the government will wait until next April.
“In fact, I would go so far as to say that there is only a 10 per cent chance that the rates will change next month.”
Not all tax specialists share Warburton’s confidence, though. Alex Henderson, a tax partner at PricewaterhouseCoopers, said: “Despite there being no historical precedent for a CGT change part of the way through a tax year, it is clear that the reason for the move is to raise more tax, in which case there is also an argument for introducing it immediately.”
Worse still for confused investors, the volatile nature of CGT rates – the highest of which was last at 40 per cent as recently as 2008 – coupled with the short-term fundraising objective of the measure means there are doubts about how long these higher rates will last.
Longer-term investors could therefore benefit from simply sitting tight until the CGT rates come down again.
Henderson said: “If you were already thinking of disposing of an asset, then it could be a good idea to do so before 22 June. However, you should not make bad investment decisions simply to cut your tax bill.
“If you have long-term assets, it is also worth remembering that we have no way of knowing when the rates will change again.”
Buy-to-let landlords are one group who may well be better off keeping their properties until CGT rates drop again – especially as recent rental yield predictions look very positive.
The change could, however, spell trouble for anyone who needs to sell a long-held investment property.
Imagine, for example, that you invested £100,000 in a second property in 1985. Typically, the property would now be worth about £490,000 – according to Nationwide’s House Price Index – meaning that the CGT bill resulting from a sale under the current system would come in at £68,493. But if CGT was charged at 40 per cent, the taxman’s cut would soar to £152,207.
Investment manager Fidelity International is therefore calling for the government to reintroduce an inflation-based indexation allowance to prevent investors of this kind paying over the odds.
Fidelity’s UK managing director Gary Shaughnessy said: “If the new government is going to increase CGT then it is only fair that they reintroduce indexation to avoid taxing illusory gains.”
The National Landlords Association (NLA), meanwhile, is hoping for buy-to-let landlords’ properties to be classed as business – rather than non-business – assets and therefore qualify for the CGT exemptions offered to entrepreneurs and other businesses.
NLA chairman David Salusbury said: “When landlords let property they are running a lettings business. Today, we are calling on the government to ensure profits from this business activity are included as part of the exemptions.”
These campaigns aside, holding on to investment property seems the best idea for the moment – especially given the unlikelihood of pushing a property sale through within the next few weeks.
“I have some investment property in my portfolio and I certainly won’t be rushing to get rid of it because of the possibility of CGT rates rising next month," Warburton said.
TAX EFFICIENT STRATEGY
Indeed, the options open to buy-to-let landlords wanting to sell up in the not-too-distant future only really become more interesting should rate rises be scheduled for April 2011.
For investors in shares and investment schemes that will be affected by the proposed CGT changes, however, acting now to avoid falling foul of rate rises on 22 June is a more realistic proposition.
Anyone yet to use their 2010/2011 £10,200 Individual Savings Account (ISA) allowance could, for example, crystallise gains at the current 18 per cent rate and use this to protect them from future tax charges.
Jason Hollands, a director at F&C Investments, said: “One strategy is to ‘bed and ISA’ the holdings, or in other words to sell them and repurchase within an ISA so that they utilise current annual CGT exemptions and incur any additional tax liability at the 18 per cent rate, while ring-fencing future returns.”
Other tax-efficient investments that could help you to avoid paying CGT at the new higher rates include offshore bonds and pension funds, while it may also make sense to wind up any trusts over the next few weeks depending on your individual circumstances.
Henderson added: "There is no easy answer when it comes to how to react to this announcement because the right approach will differ from one investor to the next. The uncertainty surrounding the move makes it even more difficult."
Seeking independent financial advice sooner rather than later is therefore the best way to ensure you don’t get caught out.