How likely will Capital Gains Tax double in the new budget? Will it kill investing?

Apodemus

Apologies, you are quite correct that indexation wasn't introduced until the 80's.  But I think CGT was flat-rate at 30% when first introduced and didn't align with income tax rates until later?

Malthusian

ChilliBob said:

Is this the offshore bond via a life insurance provider? This has been mentioned to me a few times. It seems if you're not a higher income tax payer you benefit the most (which would be my case) when you factor in the tax to bring funds back or out eventually, after say 10 years.

 

Both onshore and offshore bonds are distinguished by two things: 1) in the hands of the investor, all gains are taxed as income 2) tax is only payable when a chargeable event arises. (2 is how CGT works now, whereas income tax is the opposite.)

Onshore bonds are distinguished from offshore bonds in that the life company has to pay tax on income and gains each year. This means that when the investor takes some money out, basic rate tax is assumed to have already been paid and they only have to pay further tax if there's a deemed liability to the higher rate. Whereas with offshore bonds, income and gains roll up tax free and the investor has to pay all the tax when gains are realised.

(That is an oversimplification but it will do for now.)

Under the current system this makes them unattractive unless you have very specific circumstances (which in my cynical opinion arise more often in "This is Bob" presentations from sales reps than in real life). Because 1) CGT is taxed more lightly than income and 2) thanks to the "progressive" tax system with its multiple tax bands, it is generally better to be taxed year by year than store up a big lump of income and then be taxed on the whole lot at once (potentially resulting in more of it falling into higher tax bands).

The allowances for CGT and income on unwrapped funds, which don't apply on tax on income and gains within an onshore bond, also help to make onshore bonds unattractive.

That's under the current system. If the system was flipped on its head so that capital gains were taxed more heavily than income, investors would want to receive income rather than capital gains. Enter insurance bonds, where all gains are taxed as income. They would also alleviate the problem of being taxed both on the income from your employment and the income from your retirement fund by allowing you to defer the tax until the point you access the money. (Also the principle behind the pension wrapper. But pensions are now heavily restricted for higher earners which bonds are not.)

Moving away from the subject of bonds, taxing UK investors more heavily on gains than income would also increase pressure for UK companies to pay higher dividends (technically all companies, but UK companies are more likely to listen). UK companies would therefore be more likely to pay profits out as dividends instead of reinvesting them back into the business (giving the largest cohort of investors a higher tax bill). Not great for the economy, but hey, this is politics we're talking about.

ChilliBob

Malthusian said:

ChilliBob said:

Is this the offshore bond via a life insurance provider? This has been mentioned to me a few times. It seems if you're not a higher income tax payer you benefit the most (which would be my case) when you factor in the tax to bring funds back or out eventually, after say 10 years.

 

Both onshore and offshore bonds are distinguished by two things: 1) in the hands of the investor, all gains are taxed as income 2) tax is only payable when a chargeable event arises. (2 is how CGT works now, whereas income tax is the opposite.)

Onshore bonds are distinguished from offshore bonds in that the life company has to pay tax on income and gains each year. This means that when the investor takes some money out, basic rate tax is assumed to have already been paid and they only have to pay further tax if there's a deemed liability to the higher rate. Whereas with offshore bonds, income and gains roll up tax free and the investor has to pay all the tax when gains are realised.

(That is an oversimplification but it will do for now.)

Under the current system this makes them unattractive unless you have very specific circumstances (which in my cynical opinion arise more often in "This is Bob" presentations from sales reps than in real life). Because 1) CGT is taxed more lightly than income and 2) thanks to the "progressive" tax system with its multiple tax bands, it is generally better to be taxed year by year than store up a big lump of income and then be taxed on the whole lot at once (potentially resulting in more of it falling into higher tax bands).

The allowances for CGT and income on unwrapped funds, which don't apply on tax on income and gains within an onshore bond, also help to make onshore bonds unattractive.

That's under the current system. If the system was flipped on its head so that capital gains were taxed more heavily than income, investors would want to receive income rather than capital gains. Enter insurance bonds, where all gains are taxed as income. They would also alleviate the problem of being taxed both on the income from your employment and the income from your retirement fund by allowing you to defer the tax until the point you access the money. (Also the principle behind the pension wrapper. But pensions are now heavily restricted for higher earners which bonds are not.)

Moving away from the subject of bonds, taxing UK investors more heavily on gains than income would also increase pressure for UK companies to pay higher dividends (technically all companies, but UK companies are more likely to listen). UK companies would therefore be more likely to pay profits out as dividends instead of reinvesting them back into the business (giving the largest cohort of investors a higher tax bill). Not great for the economy, but hey, this is politics we're talking about.

Thanks. That's really interesting. In my situation I intend to live off savings and investment income at least for a bit, as opposed a salary, so I'd not be getting an 'income' so to speak. It's not clear how long this would be - depends if I decide to go back to paid employment or do something else. 

From what I could understand, and I think you're saying the same, if I was to return to paid work, as a higher rate earner, then this would make an offshore bond even less attractive than it is now. 

They have been presented to me three times now by different people, but the cynic in me wonders if that's because they know they're the only people who can provide them, and they get a fee for doing so, naturally. I think the path these people were going down is 5% can be taken out each year (I believe free of any tax or anything), and you can put your children on them or something so when you pop your clogs they get them, free of iht, and no need to realise the gain until needed. That seems to somewhat ignore the elephant in the room though that surely it's just a snowballing problem as it grows decade on decade.. But wait, aren't they typically for 10 years?!  - So, if in year 10 you're earning as a higher rate employee, you'd get slammed with like 40% tax, compared with CTG (lower for now, but who knows!).

It's making me think under current arrangements, unless I've missed something, I don't see why they all shout about them, obviously that could change though..

Old_Lifer

When CGT was first introduced,  gains made within  a year of purchase   were charged  a Short Term Gains Tax and were added to income,   which meant they were  charged at 41.25%  in the first year for a standard rate taxpayer.  There was no CGT allowance at that time.

In the late 1960s,  I made a gain within several months of purchase of 30 or 40%  on a unit trust and decided to delay sale until the year was up as I didn't want to pay nearly half the gain in tax.    Unfortunately, by the time the year was up the price had fallen and the gain was only a few percent.

Malthusian

They have been presented to me three times now by different people, but the cynic in me wonders if that's because they know they're the only people who can provide them, and they get a fee for doing so, naturally.

There are lots of providers of both onshore and offshore bonds.

If three different people have tried to sell you on the idea and you're still not convinced, and not able to explain to a third party down the pub why they will save you tax, then either the case is unpersuasive or all three salespeople were rubbish at their job.

I think the path these people were going down is 5% can be taken out each year (I believe free of any tax or anything)

You get an allowance of 5% each year of the original investment that can be withdrawn without an immediate tax charge (which roll up until the total allowance reaches 100% of the premiums), but this is not tax free; the withdrawals get added back when a chargeable event happens.

"You can get 5% tax free" is a line very commonly used to flog offshore bonds by meatheads who don't understand them to people who don't understand them.

, and you can put your children on them or something so when you pop your clogs they get them, free of iht, and no need to realise the gain until needed.

Offshore bonds are not in themselves free of IHT. If you die owning an offshore bond it is part of your estate like any other.

They are often flogged with some sort of trust-based solution which might affect IHT, but that's an entirely different topic.

That seems to somewhat ignore the elephant in the room though that surely it's just a snowballing problem as it grows decade on decade.. But wait, aren't they typically for 10 years?!

Insurance bonds are open-ended and typically end only when all lives assured are dead, with no specific end date.

You are right about the "snowballing problem". Another reason certain companies love them is that the snowballing tax charge on selling the bond is a tremendous disincentive to move your investments. If you have an St James's Place pension and a St James's Place offshore bond, you can move the pension to another provider and stop paying the inflated charges without any tax problem, but you can't move the offshore bond without cashing it in and paying any tax applying.

ChilliBob

Malthusian said:

They have been presented to me three times now by different people, but the cynic in me wonders if that's because they know they're the only people who can provide them, and they get a fee for doing so, naturally.

There are lots of providers of both onshore and offshore bonds.

If three different people have tried to sell you on the idea and you're still not convinced, and not able to explain to a third party down the pub why they will save you tax, then either the case is unpersuasive or all three salespeople were rubbish at their job.

I think the path these people were going down is 5% can be taken out each year (I believe free of any tax or anything)

You get an allowance of 5% each year of the original investment that can be withdrawn without an immediate tax charge (which roll up until the total allowance reaches 100% of the premiums), but this is not tax free; the withdrawals get added back when a chargeable event happens.

"You can get 5% tax free" is a line very commonly used to flog offshore bonds by meatheads who don't understand them to people who don't understand them.

, and you can put your children on them or something so when you pop your clogs they get them, free of iht, and no need to realise the gain until needed.

Offshore bonds are not in themselves free of IHT. If you die owning an offshore bond it is part of your estate like any other.

They are often flogged with some sort of trust-based solution which might affect IHT, but that's an entirely different topic.

That seems to somewhat ignore the elephant in the room though that surely it's just a snowballing problem as it grows decade on decade.. But wait, aren't they typically for 10 years?!

Insurance bonds are open-ended and typically end only when all lives assured are dead, with no specific end date.

You are right about the "snowballing problem". Another reason certain companies love them is that the snowballing tax charge on selling the bond is a tremendous disincentive to move your investments. If you have an St James's Place pension and a St James's Place offshore bond, you can move the pension to another provider and stop paying the inflated charges without any tax problem, but you can't move the offshore bond without cashing it in and paying any tax applying.

They've been dangled as a possibly attractive solution in intro calls as opposed to hard sell on them. If I were to go further with any of the providers I think I'd want them to illustrate some side by side scenarios with a GIA and making regular use of the (combined) cgt allowance, both under basic and higher rate tax examples. 

I'd be interested to know the (probably rare!) examples in which you feel they can be a good solution!

Chickereeeee

Contrast with Germany. Individuals have an €860 per year tax free allowance for investment income (divideds or cap gain), and also... no, thats it.
Cap gains are calculated, and paid, annually, even if not realised.
Sounds awful.

Sea_Shell

We're going to need to invest outside our ISAs for a couple of years.  So our plan is to make the most cautious of our funds the bit to be held outside.

So it's the bit likely to see the lowest growth.

On that basis, I'd be over the moon if it made enough for CGT to become payable.  (Subject to the allowance not being decimated!)

chucknorris

Aretnap said:

CGT for higher rate taxpayers was 40% until 2008, and 28% from 2010 until 2016. Most of those periods also had significantly lower ISA (or equivalent) allowances, so more people were affected by CGT than today. Believe it or not, people still invested in those days. They'll continue to invest in future if CGT goes up a bit from its historically low levels. 

Yes but back then there was allowance for inflation, taper relief and before that indexation, there has been mention of allowing for inflation again with these higher rates being considered. If inflation is allowed for, then I would agree with you. Because right now you can actually pay CGT on a real term loss, when inflation is ignored.