Act fast if you want to avoid the new capital gains hike

The new Lib-Con coalition is pledged to an early emergency budget, reports Chiara Cavaglieri
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The Independent Online

Buy-to-let investors and owners of second homes face a huge blow with a proposed capital gains tax (CGT) hike of 22 per cent under the Lib-Con coalition. This could spark a flurry of activity as investors hurry to sell their properties and shares before the start of the new tax rate, which will be announced in the upcoming emergency Budget.

As things stand, CGT is charged at 18 per cent and individuals have an annual £10,100 allowance. However, a sharp rise could see the rate raised to match the income tax rate as was originally proposed by the LibDems. This will mean that basic rate taxpayers could be charged CGT at 20 per cent and higher rate taxpayers at 40 per cent or even 50 per cent.

"This will have a significant impact on investors who have been looking for ways to supplement their income in this low interest rate environment and have used capital gains as a tax efficient means to do so," says Adrian Lowcock, from independent financial adviser (IFA) Bestinvest.

The LibDems have also called for a reduction of the allowance. This would see many more investors caught in the CGT net. These changes could be introduced as early as next month, which leaves investors little time to plan for the increased tax rates.

"If you're considering realising large gains at some stage this tax year – selling buy-to-let property, for example, or restructuring a portfolio – seriously consider doing it now. The current rate of 18 per cent is as low as it is ever likely to be," says Danny Cox, from IFA Hargreaves Lansdown.

Transferring assets into your spouse's name so that you can make the most of both annual allowances can be a simple way to avoid CGT as transfers between married couples and civil partners are exempt. Also, if assets are to be levied at income tax level, it may be beneficial to change ownership to the lower earning spouse.

The next step for those looking to shelter their assets from the increase is to make full use of CGT-free investment wrappers such as Individual Savings Accounts (ISAs) and pensions. Selling holdings and repurchasing within a tax-free wrapper will allow investors to use up this year's annual CGT allowance, incur tax liability at the current rate before it rises and keep future returns away from the tax authorities altogether. With the full ISA allowance at £10,200, most people will be able to move a large proportion of their investments. Similarly with a pension, investors can sell their assets and buy back within a Self-Invested Personal Pension (SIPP) as a pension contribution.

"Tax relief is added to the contribution, so a £1,000 'Bed & SIPP' transaction has £250 tax relief added. Higher rate taxpayers could reclaim up to a further £250 tax via their tax return," says Mr Cox.

Other alternatives include Enterprise Initiative Schemes (EIS) and Venture Capital Trusts (VCT), which both give CGT relief. However these are both highly risky investments and with an EIS, the proceeds of a sale are only deferred, so CGT will still need to be paid later.

"Other CGT exempt assets include government gilts, private motor cars and anything considered to have a useful life of less than 50 years. These won't trigger a tax bill but equally may not appreciate in value so people should take care when investing in these assets," says Robert Forbes from IFA Plutus Wealth Management.

There is a strong argument for homeowners leaving their assets in place and taking a more long-term investment view to see how CGT rates pan out later.

"Only a few years back we already had a top rate of CGT of 40 per cent. Tax rates will change from time to time and if you don't dispose of your assets it won't trigger any liability at all," says Dan Clayden, from IFA Clayden Associates.

Top tips to avoid CGT

1 Wrap as much of your investments as possible into ISAs. You can shelter up to £10,200 free of tax.

2 Each person has an allowance of £10,100 in gains before any tax is charged.

3 If you have any losses from previous years then you can carry these forward and offset against gains made.

4 Transfer assets into your spouse's name. Transfers between married couples are not deemed as a sale.

5 Invest in CGT-exempt products as gains on venture capital trusts are not subject to CGT.

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