Capital gains still efficient for high earners

Investors are being warned to expect to an increase in capital gains tax (CGT) in the pre-Budget report on December 9 – but most advisers still believe growth investments will offer advantages over income holdings for high earners.

With a new 50 per cent rate of income tax being introduced from next April on earnings over £150,000, the 18 per cent flat rate of tax on annual gains over £9,200 is seen as a candidate for an increase by a government needing revenues.

“CGT has become anomalous at 18 per cent compared with income tax, so it is an obvious tax to increase,” says Malcolm Cuthbert, partner at Killik & Co.

But while HSBC Private Bank and Bestinvest believe this is a reason to delay investment decisions until after the chancellor’s speech next month, the majority of advisers polled by FT Money says CGT-liable or income tax-free investments are worth considering now.

1. Use Isa allowance

Individual savings accounts (Isas) can now be used by over-50s to keep £10,200-
worth of investments free from income tax and CGT every year – and, for over 18s, the limit rises from £7,200 to this level in April. “Buy your funds and equities within an Isa – after all, a couple can save £20,400 a year into their Isa from next April,” says Cuthbert.

2. Boost your Sipp

High earners paying 50 per cent income tax from next April can still make contributions to a self-invested personal pension (Sipp) of as much as their annual salary, or £30,000 if they make irregular payments, with 40 per cent tax relief.

“Put as much money as you can into your Sipps and your Isas,” says Mark Dampier of Hargreaves Lansdown.

3. Buy zeros

Zero-dividend preference shares, issued by split capital investment trusts, pay a fixed sum on redemption if the trust achieves a “hurdle” rate of return – and are liable only to CGT.

“Zeros are an obvious attraction with CGT at 18 per cent, though investors need to understand risk profiles,” says Charles Cade of Numis.

4. Get structured

Capital-protected structured products that produce a return liable to CGT can be suitable for high earners who want to manage risk. “Investing in CGT-efficient products such as a high- growth unit trust or a structured product, with a suitable counterparty, is extremely beneficial to higher earners under the current 18 per cent rate,” says Matthew Woodbridge. of Chelsea Financial Services.

5. Absolute returns

Absolute return funds aim to produce low but steady capital growth in all market conditions. Bestinvest recommends the Gartmore UK Absolute Return fund managed by Ben Wallace. Mark Dampier of Hargreaves Lansdown prefers the Cazenove and BlackRock funds.

6. Invest in business

Individuals owning businesses can claim “entrepreneur’s relief” on the first £1m of lifetime qualifying gains at an effective tax rate of 10 per cent. “Politically, this might be difficult to take away,” suggests Cuthbert. Buying commercial property or a business with a loan can allow investors to offset the interest against any income to reduce tax.

7. Use your losses

Investors who have realised capital losses can use these to reduce taxable gains – effectively increasing their annual CGT exemption.