18 Mar 2011 | Capital Hill

Capital Hill on...Capital Gains Tax 

With some UK earners facing a tax burden of almost 70%, you owe it to yourself to take full advantage of tax breaks this year says Jennifer Hill.

January’s VAT increase and the proposed increase to National Insurance from April this year, mean that basic-rate taxpayers could soon be paying out over 43%* in taxes on each new pound they earn and spend.

Higher- and additional-rate taxpayers fare even worse. They’re set to be hit with marginal tax rates of 52% and 60% respectively*, while those earning just over £100,000 and caught in the personal allowance ‘tax-trap’ face a staggering tax burden of 68%*.

If your investments have done well, what better way to beat the taxman than to make full use of your capital gains tax (CGT) allowance?

This is £10,100 for the current tax year, so you can make gains up to this level without lining the taxman’s pockets. A capital gain is the increase in the value of an asset between buying and selling it. To arrive at your total gains for the year, simply subtract capital losses from capital gains.

Some assets however, are CGT-free. These include your main home (known as your ‘principle private residence’), your car, individual savings accounts (ISAs), UK gilts (government bonds), personal belongings worth £6,000 or less at sale and winnings from betting, including the National Lottery.

Some £2.5 billion in CGT was collected in 2009-10 – a figure that could rocket after the government increased the rate for swathes of the population.

Gains in excess of the allowance were charged at a flat rate of 18% up to 22 June 2010. Thereafter, the rate was increased to 28% for higher-rate taxpayers. The gain is added to your taxable income to assess your CGT rate: basic-rate taxpayers could also be hit with the new rate if the sale of an asset takes them over the higher income threshold.

Mitigating CGT is often easy with some careful planning. So what can you do?

Techniques like ‘bed and ISA’ and ‘bed and pension’ can provide ways to shelter existing investments from CGT.

This is where you sell a share or fund, and then buy it back again, this time in a tax-efficient wrapper, like an ISA or a self-invested personal pension (Sipp), to make full use of your tax allowances. The sale crystallises capital gains and, provided your total gains are less than the allowance, no tax is due. Once in an ISA or pension, the assets are sheltered from future CGT.  Baillie Gifford offers an investment trust ISA which gives you access to the stock market by investing in a range of eight investment trusts. Investment trusts can also be held in a Sipp, for those looking to take advantage of ‘bed and pension’ rules. Please note that Baillie Gifford does not offer a Sipp.

‘Bed and pension’ has the added benefit of attracting income tax relief on the contribution. If £10,000 worth of funds is ‘bed and pensioned’, a further £2,500 of tax relief is added to your pension pot and higher-rate taxpayers can claim up to an additional £2,500 tax relief.

Such strategies work particularly well for investors who don’t want to commit further cash to the markets, but want to take full advantage of their tax allowances.

Transferral of assets between married couples and civil partners is CGT-free, so you should ensure you make full use of your spouse’s allowances too.

And if you’re unlucky enough to have clocked up capital losses, you could extend your CGT allowance by realising losses on poor-performing investments.

*Source: Fidelity International

The views expressed in this article are those of the author and should not be considered as advice or a recommendation to buy, sell or hold a particular investment.  They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

Past performance is not a guide to future performance.  All investments you make in a Sipp or ISA are subject to risk and the value of these investments and any income from them can go down as well as up, and you may not get back the amount you originally invested. Where a trust invests overseas, exchange rates can also affect value and income.

The value of any tax reliefs will depend on your individual circumstances and tax rates and reliefs, as well as the tax treatment of ISAs and pensions, could change at any time.

Author: Jennifer Hill
Jennifer is an award-winning British financial journalist. She recently left The Sunday Times, where she was deputy Money editor, to set up her own company, mediahill Ltd. She is a previous personal finance correspondent of Reuters, the global news service, and personal finance editor of The Scotsman newspaper.

She has won or been shortlisted for six Headlinemoney awards, the ‘Oscars’ of personal finance journalism in the UK. She has also scooped or been nominated for accolades from the Association of Investment Companies, Ignis Asset Management, the Association of British Insurers and the British Insurance Brokers’ Association.