Savers and investors should sort out their finances before a shake-up on taxes for capital gains and income take effect this April. Despite a boast by the Government that the scrapping of the complex capital gains tax system will benefit savers, the reality is that many will be worse off as a result of the changes, which were announced in Alistair Darling's first Budget in October.
From 6 April, a single rate of 18 per cent will be payable for all gains above the current annual capital gains tax (CGT) threshold allowance. This allowance currently stands at £9,200, but is expected to increase for the next tax year. Currently, higher-rate taxpayers pay 40 per cent on gains above this level, while lower-rate taxpayers pay 20 per cent. But the complicated taper relief and an earlier indexation formula is also being ditched, which means that those who have held assets, such as shares, for a long time might lose out on paying lower tax bills.
Neil MacGillivray is head of technical support for James Hay, part of the Abbey group. He says: "All individuals who have investments with potential gains should consider taking action before the end of the tax year. People who initially held high-value assets might be better off disposing of them now – as would many thousands of people who hold shares picked up through company schemes such as Save As You Earn (SAYE)."
MacGillivray explains that higher-rate savers who have held shares in the company in which they are employed for as little as a couple of years can find themselves liable to a tax bill of just 10 per cent at the moment, thanks to taper relief. However, from 6 April, that will rise to 18 per cent.
He points out that if you have a gain of £20,000, you are currently able to take advantage of 75 per cent taper relief that leaves you a taxable gain of only £5,000 – which falls under the annual exemption limit. From next tax year – after subtracting the current exemption limit of £9,200 – this same £20,000 asset would have £10,800 subject to an 18 per cent tax bill – that's £1,944.
This is despite the headline appeal that capital gains tax on chargeable gains – anything above the £9,200 personal allowance – will be 18 per cent instead of the previous 20 per cent for basic-rate taxpayers or 40 per cent for those on a gross salary of £39,825 after taking the basic allowance of £5,225 into account.
The income tax changes from 6 April also involve a much heralded lowering of the basic rate of interest rate from 22 per cent to 20 per cent. However, the devil is in the detail, as the 10 per cent rate on the first £2,230 of taxable earned and pension income is being scrapped at the same time and replaced with the higher 20 per cent rate.
Ed Green, financial planning manager for Chartwell Private Client, warns: "On the face of it, this looks like good news as the basic rate of income tax is going down. But the reality is that the changes to your pocket will hardly make a difference. However, one area that should be of concern is for people with a personal pension. At present, tax-relief means that, for a basic-rate taxpayer, a contribution of 78p into a pension fund is made up to £1 – this will soon be only 97-and-a-half pence. The changes will also affect higher-rate taxpayers. Now is therefore a good time to put in a lump sum."
Another group that will be hit by the income tax changes are those on low incomes, currently paying only 10 per cent on pay above their £5,225 basic allowance. This benefits those on an income of up to £7,455.
Pensioners could also be particularly hard hit by the change as they will be forced to pay the higher 20 per cent rate of tax on pension income above the initial tax-free allowance, currently £7,550 for individuals aged 65 to 74 or £7,690 for those aged 75 or more. Previously they paid a tax rate of just 10 per cent for the following £2,230 of income above this allowance, but this will now only apply to savings income.
Investors in the Alternative Investment Market (AIM) may also be disappointed, as a previous CGT rate of 10 per cent (after holding the shares for two years) will be eliminated, rising to 18 per cent. However, small-time investors can benefit, as anyone who makes sure they put the first £7,200 of savings each year into an equity ISA face no CGT on that money.
Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT), which were previously great ways for the wealthy to avoid tax, have also lost much of their allure with the simplification and lowering of CGT.
Paul Devonshire, an offshore specialist for City-based PJD Tax believes non-domiciled workers could find themselves particularly hard hit by the changes. He explains: "If you look at the maths then the Government is giving with one hand but taking with the other for most of us. However, non-domiciled workers who have been in Britain for more than seven years and have an annual offshore income of more than £1,000 could get a particularly nasty surprise. They may be forced to pay tax on this income or hand over £30,000 a year to maintain independence. The full details for individuals are still being unravelled and may need an expert to sort out."
To find a financial adviser in your area, visit www.unbiased.co.ukReuse content