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Put CGT to bed

Created:

9 February 2010

Written by:

Maike Currie

Granted, I did it get wrong when I predicted the Chancellor would announce a hike in capital gains tax (CGT) in his pre-Budget report, at the end of last year. To the susprise of many analysts, he had nothing to say on the matter. But with the 2010 Budget coming up, and a possible 'emergency Budget' after that if the Conservatives win, I still maintain that it is very much a matter of when CGT goes up - rather than if.

Danny Cox, head of advice at Hargeaves Lansdown agrees. He says the gap between income tax rates and capital gains rate is "a huge open goal" making an eventual rise in CGT "inevitable".

Prior to 6 April 2008, CGT was paid at the same rate as investors paid income tax and a return to this system is one possibility. However, a link to earnings would also require the return of tax incentives for long-term investment, such as taper relief, which reduced the tax rate according to the length of time that asset has been held, but which was abolished in April 2008. "This points to the likelihood of retaining the current simple flat rate system, but increasing the rate. A rise in CGT to a flat rate of 25 per cent seems favourite," says Mr Cox.

So what should you be doing right now to save CGT?

Use it or lose it

First off, it's important to use your annual allowance of £10,100 to realise gains. The allowance does not accumulate, so you cannot expect to roll up all your previous allowances and use these in one go. CGT can apply to a variety of assets, including investments such as stocks and shares, a second home or property, high-value possessions such as paintings, jewellery and antiques and business assets. To use your annual tax-free allowance, you have to realise a gain in that tax year, and this means selling out of the investment.

If it's possible that you'll be making large gains at some stage, by selling buy-to-let property for instance, you should consider selling this year and taking the tax charge at the current rate, says Mr Cox.

In the past, many investors used to realise a gain equivalent to the tax-free allowance on the last day of the old tax year, and then buy exactly the same investment back again at the start of the new tax year. But the so-called "bed and breakfasting" loophole was closed in 1998, and you must now wait at least 30 days before you can buy the same investment again.

However, bed-and-breakfast has been replaced by a plethora of other 'bed-and-' strategies, which can be useful ways to realise a tax-free gain (or loss), either within the annual allowance or at the current rate of 18 per cent, with the view to rebase and in many cases shelter investments from future taxation.

They include:

• Bed & Isa: The investor realises a gain by selling the shares or funds and then immediately buys them back within an individual savings accounts (Isa) wrapper as a contribution - £10,200 for those aged 50 this tax year, £7,200 for others. This takes advantage of the fact that the 30-day rule does not apply to Isas.

• Bed & Sipp: Here the investor sells the investment then buys it back within a self-invested personal pension plan (Sipp) as a contribution. Tax relief is added, so a £1,000 Bed & Sipp has £250 tax relief added.

• Bed & Spouse: Move investments into your spouse's name before encashment, and use their annual CGT allowance as well as your own.

• Bed & Spread: You can't buy the same investment back within 30 days, but you could buy a similar one. For instance, you could sell a parcel of BP shares and buy those of Shell, or sell Invesco Perpetual High Income and buy Artemis Income. This is a useful strategy if you've already 'bedded' investments into an Isa or Sipp.

The biggest risk to these type of transactions, according to Mr Cox, is the time out of the market in the buying and selling process. However, this risk can eliminated in most nominee services and fund supermarkets such as HL Vantage, as the same day prices are used.

Paul Kennedy, head of tax and trust planning at Fidelity International, also warns that investments that are subject to CGT can often carry higher risk so use them only if they are suitable for you. And he also warns against letting the tax tail wag the investment dog. "Generally, use your Isa allowance first and then, where your investments fit, look to see if CGT offers the possibility of some more tax-free return and/or an otherwise relatively low rate of tax."