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CGT and Income Tax

Hi,
I currently have a fair amount of savings invested in stocks, but am currently unemployed. My wife works and earns about £20,000.

I am obviously a little bit concerned by the likely increase in CGT, because any income we receive from our investments makes a big impact on us, so a potential change from 18% to 40% is a big deal.

From what I understand, it is likely that the CGT rules will revert to something like they used to be, with taper relief and a rate based upon your income.

Now, I know that the changes in CGT (especially that they may go back to the old system) is just speculation at the moment, but I wondered if anybody could please tell me what my situation would have been, before the 18% rate was introduced (I have only started investing since then)?

As I don't currently pay any income tax, does that mean that I would not have had to pay any CGT regardless of the amount of capital gain? If I'd got a new job, and been in the 20% income tax bracket, would I then have paid 20% CGT?

Any help would be greatly appreciated.
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Comments

  • dunstonh
    dunstonh Posts: 117,923 Forumite
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    edited 13 May 2010 at 3:14PM
    I am obviously a little bit concerned by the likely increase in CGT, because any income we receive from our investments makes a big impact on us, so a potential change from 18% to 40% is a big deal.
    What are the investments? What tax wrapper are they in? What sort of amounts are we talking about? What is the growth element of the portfolio and what is the income element? Are you doing bed&ISA each year and utilising your CGT allowance?
    From what I understand, it is likely that the CGT rules will revert to something like they used to be, with taper relief and a rate based upon your income.
    The old way with taper relief was actually cheaper for long term holds but more expensive for short term holds.

    Unless the size of the investments is significant, it is unlikely to be much or any impact. if you bed & ISA each year, use your CGT allowance each then you can manage it. It may also be that the investment bond tax wrapper may become suitable or a tweaking of your investments to focus on income rather than growth.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • Stavros_3
    Stavros_3 Posts: 1,288 Forumite
    Here's an interesting article. The news coming out is a bit confusing at the moment. http://timesbusiness.typepad.com/money_weblog/2010/05/five-tips-to-avoid-capital-gains-tax.html

    Are they suggesting a CGT rise across all C.G, because the news are reporting it will be on second homes only. Obviously if its across the board the percentage rise is frighting for investors when they finally cash in their portfolio's
    Liquidity is when you look at your investment portfolio and **** your pants
  • dunstonh
    dunstonh Posts: 117,923 Forumite
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    edited 13 May 2010 at 4:48PM
    Everything so far suggests it will be across the board on individual assets (not business).
    the percentage rise is frighting for investors when they finally cash in their portfolio's
    Not necessarily.

    1- If you are a couple you can put £20,400 in each year into the ISAs.
    2 - pensions come back into play as forced annuitisation is also proposed to be removed at age 75. So, you will be able to hold investments until death outside of the estate but subject to 35% tax (35% tax seems a lot but tax relief on contributions plus tax free growth minus the 25% taken out tax free makes it less of a problem plus 35% taxed on the remainder is better than 40% IHT). There is no tax on transfer to spouse.
    3 - investment bond wrapper allows you not to pay personal CGT and modern investment bond wrappers can work exactly the same as ISAs and pensions in that you can hold shares and unit trusts etc and at the same cost. You get corporation tax liability instead on the capital growth at 20%.

    So, if you are going to find yourself in the 40% CGT range then there are ways to avoid it. Most of these methods already exist but with CGT at 18% flat its not really something that concerns many people. At 40% you then have to be more careful.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • shaun_from_Africa
    shaun_from_Africa Posts: 12,858 Forumite
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    If the CGT limits do change, is there any possibility that the changes could be implemented before the new tax year, or would this be impossible to do?

    I know that any VAT changes can be brought at very short notice, but was wonding if CGT was the same.
  • dunstonh
    dunstonh Posts: 117,923 Forumite
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    If the CGT limits do change, is there any possibility that the changes could be implemented before the new tax year, or would this be impossible to do?

    I know that any VAT changes can be brought at very short notice, but was wonding if CGT was the same.

    If it was Gordon Brown then it could be implemented and backdated to last year if he wanted to. He did like the retrospective changes. However, that sort of retrospective taxation was not as common under previous Conservative Governments. Typically you would expect it to either be from the next tax year. Although nothing stops them saying midnight on budget night. After all disposals creating a chargeable event occur on a given day and you could have a before rate and an after rate in the same tax year. Nothing stops them saying 6th April 2010 either.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • slinga
    slinga Posts: 1,485 Forumite
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    edited 14 May 2010 at 2:21AM
    dunstonh wrote: »
    3 - investment bond wrapper allows you not to pay personal CGT and modern investment bond wrappers can work exactly the same as ISAs and pensions in that you can hold shares and unit trusts etc and at the same cost. You get corporation tax liability instead on the capital growth at 20%.

    Can you explain these a bit.
    How do we find them?
    Do H&L do them.

    Any info online?

    Thanks.

    Found some info: http://www.wiseinvestment.co.uk/sub.php?globalId=2&subId=13
    It's your money. Except if it's the governments.
  • StevieJ
    StevieJ Posts: 20,174 Forumite
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    dunstonh wrote: »
    If it was Gordon Brown then it could be implemented and backdated to last year if he wanted to. He did like the retrospective changes. However, that sort of retrospective taxation was not as common under previous Conservative Governments. Typically you would expect it to either be from the next tax year. Although nothing stops them saying midnight on budget night. After all disposals creating a chargeable event occur on a given day and you could have a before rate and an after rate in the same tax year. Nothing stops them saying 6th April 2010 either.

    I personally think this will be backdated for the whole tax year otherwise it could prove a major disruption to the housing market, also we don't actually know that the CGT allowance will remain, so it is a wait and see.
    'Just think for a moment what a prospect that is. A single market without barriers visible or invisible giving you direct and unhindered access to the purchasing power of over 300 million of the worlds wealthiest and most prosperous people' Margaret Thatcher
  • dunstonh
    dunstonh Posts: 117,923 Forumite
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    Can you explain these a bit.

    The investment bond wrapper is a very old tax wrapper. Historically, the insurance companies offered them as a standalone product and used funds that were often not that good to be honest. Although modern versions offer much larger fund ranges with all the usual names you would expect. However, things have also moved on a bit more and you can get the wrapper from a number of platforms which invest in unit trusts and direct investments. So, that gives you a clean charging structure.

    Technically, investment bonds are classed as life assurance. So, they fall under life fund investment rules. They are usually best for higher rate taxpayers who will be basic rate (or lower) in future as they can defer the tax liability until they are a basic rate taxpayer and avoid higher rate tax. Those that over 65 and close to the age allowance reduction level can use them and take an income from them and that income doesnt go towards their taxable income. So, can save nearly £1000 a year in tax.

    The negative is that they pay 20% tax on the capital gains within the investment. However, they still benefit from taper relief so the real charge is usually closer to around 11-13%. When CGT dropped to 18%, the advantage there with the bond was eroded. When it was 40% then you could see the benefit. If CGT goes back up, the investment bond may come back into play.
    How do we find them?

    I dont believe many of the DIY providers have done them as it requires the provider to be registered as a life assurer. Most of the IFA platforms do them and insurance companies still do the older versions (some of which are fine but some are well past their sell by date and should be avoided).
    Do H&L do them.

    Only via the advice arm. Not on their DIY platform I believe.
    I personally think this will be backdated for the whole tax year otherwise it could prove a major disruption to the housing market, also we don't actually know that the CGT allowance will remain, so it is a wait and see.

    I think that would be the logical way of doing it but politics and logic...... I hope the CGT allowance remains. Could you imagine the amount of admin involved with small investors if you had to declare all gains. That certainly would bring the investment bond back into play big time.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • SnowMan
    SnowMan Posts: 3,447 Forumite
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    edited 16 May 2010 at 9:54AM
    I won't go into the politics of whether it is a good idea, and I'll assume we are talking non-business assets.

    It certainly looks a possibility the existing capital gains allowance of £10,100 will be reduced.

    I think the Liberal Democrat policy is to reduce the exemption from £10,100 to £2,000 which could have a major affect on investors who have a significant amount invested in shares outside of an ISA (as well as those with second homes). Ignoring the financial affect, one of the difficulties of reducing it that low is that it will mean people with relatively small gains (e.g. £3,000) will have to get their calculators out to do the complicated sums.

    Nobody quite knows what the Tories and Liberal Democrats will come up with in their emergency budget and whether it will apply in relation to CGT from 6/4/2011 or straight away or from the beginning of this tax year. The reduction in the allowance raises about 900 million, I believe, so must be tempting for them.

    It certainly seems odds on that capital gains will again effectively be treated as income (i.e. taxed at 0%, 20%, 40% or 50% based on total income including gains rather than the flat 18%).

    I can't see them re-introducing taper relief but of course it is possible.

    I imagine any tax "loopholes" will be closed, that could include adjustment to investment bond taxation but how they go about doing that I don't know.

    There is some political talk of whether property gains and share gains might be treated differently (obviously venture capital is already treated and likely to remain treated differently) - Cameron gave the impression of the possibility of different CGT for different classes of investment this morning but was of course very vague.
    I came, I saw, I melted
  • Stavros_3
    Stavros_3 Posts: 1,288 Forumite
    It is investors I fear for. My position is recently retired, large investment portfolio that I was keeping until 2014. What incentive is it to keep taking risk but hit with a 40% CGT bill at the end
    Liquidity is when you look at your investment portfolio and **** your pants
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