It is widely believed that we will find ourselves with capital gains tax increased from the current 18% to as much as 40-50%, with the gain added to income. This will have two possible impacts on the housing market.
Consider how you can achieve returns on an investment property. There is a potential income and a potential capital increase. The risks lie with the possibility of a lack of occupancy affecting the income and property prices falling.
And so the potential for gain will have to offset this potential for loss.
How can the government expect us to become excited about investing in property where the income on the property is taxed at the highest rate and the gain on sale will also be taxed at the highest rate.
The potential for gain is so diminished that investors will be discouraged from investing at all.
The concern is that this will stifle demand (why would you buy) which will then lead to a fall in markets. As we are a debt driven economy each fall in house prices directly impacts consumer confidence and in turn spending on the high street which is a large impact on GDP (the economy).
There is also the potential however that property investors realise they cannot sell their house due to the tax and so supply is greatly reduced and counterbalances the market. We will see.
Investors who normally buy shares, property and unit trusts, Oeics will be subject to the new capital gains hikes and so should look to realise some gains where they can, to crystallise them in this tax year pre budget.
After that budget the canny planning will begin. Consider however, what you can do right now.
Isas are tax free so you should maximise them and if you have a pension and are a higher rate tax payer, consider making a contribution now as higher rate tax relief will probably disappear.
In the meantime, there is a tax efficient vehicle that many investors are missing out on. That is the offshore bond. Before you think 'Cayman islands,' this is simply a normal investment bond which is held in tax beneficial regions such as the Isle of man, Ireland, Jersey and Guernsey. Norwich union or Standard Life may have a UK life office but they also have an offshore version in one of these tax constituencies.
The effect/benefit is that the investments do not pay tax as they grow and you benefit from compounding gross roll up of growth.
You can buy the same property and shares inside the bond as you can outside of it but they simply grow free of tax.
Investments are taxed as income rather than capital gains tax and so the gain at encashment is added to your income. However this is where you can potentially save.
Investment bonds allow you to assign parts of them to others who have a lower tax rate than you. For example if a segment of your investment bond was assigned to your child who was going to university and they encashed it, the gain would be added to their income for the year.
If their income tax allowance was, say £6475 (the government are talking about increasing the income tax allowance to over £10,000) and the bond was encashed with a £13000 value but the gain was less than £6475, there would be no tax to pay.
This is an excellent way to achieve tax free growth and tax free distribution, particularly if the government are signposting that income tax allowances will increase substantially.
Another option is to become non resident for a year and then encash and you will not be subjected to UK income tax.
Make sure you use a fee based independent financial adviser as the commissions (often disguised) on bonds are very high at c8%, but also a 2-3% fee to an adviser is far more efficient than a 2-3% commission on an offshore bond due to how the life office can reclaim that expense.
If you have a query on annuities, CGT offshore bonds, tax or property in tax efficient wrappers call Peter on 0845 230 9876
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