Wealthy shift assets to avoid top tax rate

Private banks and wealth managers are scrambling to shift their clients’ assets ahead of April to avoid paying the new top rate of income tax.

Wealth advisers reported “frustration and anger” from their clients, who have instructed them to do all they can to mitigate the effect of the new tax regime.

From April 6, people earning more than £150,000 will have to pay a top marginal rate of 50 per cent on income, up from 40 per cent at present rates.

Advisers to the wealthy tend to face resistance over end-of-year tax planning, which is often viewed as a boring chore. But this year, clients have been showing a keen interest.

“It’s something that everyone is interested in hearing about,” said Patricia Mock, a director in Deloitte’s private clients practice. “It’s a tipping point – it’s half your income.”

David Austin, a managing director at Cazenove Capital, said: “The 50 per cent has aggravated a number of people and trying to look at sensible ways of reducing the effective rate is concentrating people’s minds.” Tax consultants say they can reduce the effective rate to less than 40 per cent.

High earners are being advised to take income before April, whether in the form of earnings, pension payments or revenue from share options. Some are in discussions with their employers over whether early payouts will be possible.

Other strategies include closing bank accounts that pay yearly interest to get the interest immediately at a lower rate of tax. Investment bonds are being shut early to pay the lower rate of income tax. People are also putting off making gifts to charity to the next tax year to maximise the relief on contributions.

Basic ‘tax housekeeping’ between married couples – transferring assets to a non-working spouse, or one paying basic rate tax – has now been extended to spouses that pay 40 per cent instead of 50 per cent tax.

The yawning gap between income tax and capital gains tax rates is also spurring investors to sell out of income-producing investments and snap up those that are taxed as capital gains at 18 per cent. The new 50 per cent income tax has hastened this trend, say advisers.

Venture capital schemes that offer generous tax breaks on contributions are being touted as an alternative to pensions for high earners, who also face restrictions on tax relief on their pension contributions.

Tax deferral vehicles such as offshore investment bonds are also being used by wealth managers.

These wrappers allow investments to be held free of tax until the bond is encashed – which could be at a later date when clients are on a lower tax rate, or the regime has changed.