Buy to Let and investments to be hit by higher CGT?
In order to pay for Nick Clegg’s income tax break for low to medium income workers, the Tories have reportedly had to compromise on Capital Gains Tax which now looks set to increase substantially. This could cause a rush to sell second properties and investments before the new limit comes in to play so Freelancers need to keep their wits about them over the coming months.
Following their decision to form a coalition government, the Lib Dems and Conservatives have begun releasing news of their proposed changes to the tax system. One of the key changes is likely to be an increase in Capital Gains Tax from 18% to 40% and the tax may soon be payable on profits far below the current £10,100 annual limit.
The CGT increase is likely to apply to ‘non-business’ assets such as second homes and investment shares in a bid to reduce the Governments budget deficit, hopefully without harming the businesses that the economy needs to thrive. It is not known yet when the increase will take affect but it is widely speculated that this will be announced in George Osborne’s emergency budget on 22nd June 2010. Industry insiders believe that the higher rate of CGT will come in to play in April 2011, whilst some are even speculating that it will begin immediately following the budget announcement. Rather worryingly, there are even concerns that the CGT increase may be back dated to the beginning of this tax year, although this seems unlikely.
This level of uncertainty makes it difficult for investors to plan. Selling immediately in a fire sale may greatly affect returns but delaying may mean you fall foul of the 40-50% tax on your profits. In any case if any increase is back dated a premature sale may still be hit by the new tax.
If you own a second property then you need to tread carefully as any changes to the CGT rate may seriously affect your overall returns.
Buy to let investors could rush to sell their portfolio before changes come in to play, however in turn this could help investors willing to stay put who could capitalise on the increased demand for rental properties as tenants are forced out by landlords looking to sell. If you are not in a hurry to sell then you may benefit from increasing your rent in the years to come.
Offshore bonds, which we have covered in previous Planet Contractors, are expected to see a leap in popularity as investors try to minimise their exposure to the higher CGT. Investments held offshore can benefit from gross roll up of returns until such time as you may be paying a lower rate of income tax and therefore potentially lower CGT on profits.
Another way to avoid this rise in CGT is to invest in an ISA which is free from tax on up to £10,200 each year.
If you want to keep invested in equities but are concerned about the implications that a 20-30% rise in CGT may have on your investments then a stocks and shares ISA or offshore bond could offer you the ideal opportunity to remain invested without losing any gains to the tax man. Drip feeding contributions in to an ISA or bond protects against potential dips in asset values because this allows you to benefit from pound cost averaging on your investment, minimising the risk of trying to time the markets. Starting to invest now will stand you in good stead for any announcement George Osborne makes on 22nd June.
To speak to our investments specialists call Tony Harris, Andrew Gains or Richard Braid on call 0845 062 8888 or email advice@contractorfinancials.com to discuss ways to minimise your capital gains exposure.
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