Tax
Capital Gains Tax rise: Do not rush to bonds |
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| Tax | |
| Written by Gary Howes | |
| Wednesday, 26 May 2010 | |
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Skandia says majority of investors will be able to use an exemption to avoid CGT rises.
The Coalition Government's planned Capital Gains Tax increase should not prompt an investor rush into insurance bonds warns Skandia. The previous reduction in CGT to a flat rate of 18% in 2008 made people wake up to the value of the annual CGT exemption - currently £10,200 for everyone. The vast majority of investors will with suitable planning be able to use the exemption to ensure that they pay no tax on their investment gains each year. Coupled with this there are also new collective investments that focus on tax mitigation. For example, Skandia’s Spectrum range of risk rated funds are automatically rebalanced to ensure they remain in line with the investors risk profile without triggering a CGT liability. The market for insurance bonds will not increase significantly even if the rate of CGT is increased. However, there are various scenarios where bonds will still be attractive, two of the main topical ones being: 1. High yield, low growth assets where the investor is a higher rate taxpayer or where they are in receipt of additional allowances (such as age allowance), as within a bond the extra income tax on the yield will be deferred. 2. Trustee investments, especially where income is reinvested as within a bond the new 50% tax on interest or 42.5% on dividends will be deferred. Phil Carroll, platform marketing manager at Skandia, comments: “To use any CGT increase as the sole reason to justify bond sales is clearly too simplistic. Bonds and collectives have a part to play in financial planning, but driven by client centric needs and understanding of the taxation of the wrapper at one level, and the underlying investment at the next. Advisers will need to look past the headline rates of tax and ensure they are using their client’s individual allowances to maximum effect. A very small proportion of the population pay CGT because the annual allowance is extremely valuable for those holding assets subject to CGT. If the CGT rate and annual allowance do change then clearly existing and new clients will review their portfolios with their advisers to ensure tax is minimised while still achieving the investment objectives.”
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