December 11, 2009 6:56 pm

Investors urged to sell before next tax rise

Capital gains tax (CGT) will almost certainly be raised in a pre or post-election Budget, to bring it in line with higher rates of income tax, wealth advisers have warned – giving investors a six-month window to realise gains tax efficiently.

In this week’s pre-Budget report (PBR), chancellor Alistair Darling announced a freezing of both the personal allowance for income tax and the threshold for higher rate tax – which will push hundreds of thousands of investors into the 40 per cent higher rate tax band, and some into the new 50 per cent band on income over £150,000, from next April. But, contrary to many predictions, there was no change to the 18 per cent flat rate of CGT.

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A majority of tax advisers now believe this anomaly will have to be addressed in the next Budget. Seven out of ten advisers polled by FT Money said they expected the gap to be closed or eradicated, no matter which party wins the next election.

“The gap between CGT and income tax is not sustainable,” said Jeremy Croysdill, head of tax at Kleinwort Benson. “We were surprised that the gap was not narrowed in the PBR.” Francesca Lagerberg of Grant Thornton believes it will be closed in the next full Budget. “It is hard to imagine the CGT and income tax rates remaining so far apart in the medium term – post an election CGT must be on the agenda as a tax to review.”

Some think the 32 per cent tax gap for high earners may close sooner. “It could be closed by Darling in the March Budget or post election – it should be remembered that a former Conservative chancellor, Nigel Lawson, equalised the income tax and CGT rates at 40 per cent to negate schemes designed to convert income into capital,” said Stephen Herring, senior tax partner at BDO.

HSBC Private Bank, RBC Wealth Management, Vantis and Bestinvest also forecast an increase in CGT after the next election.

As a result, many advisers are recommending that investors sell up and realise taxable gains at the 18 per cent rate, while it lasts. “There could well be a tax advantage in bringing forward sales of investments which will be made in the next 12 months or so before the 5th April 2010 or, if one is very cautious, before the March 2010 Budget,” said Herring. Adrian Lowcock of Bestinvest advised investors with large or volatile holdings to consider “taking the tax hit whilst the gain is there”.

Those who believe that the CGT gap will close, but not disappear, suggested using investments that incur only CGT. “Zero dividend preference shares will become more attractive with no income stream, to avoid higher rates of income tax and returns charged to CGT,” said Croysdill. Alex Henderson, tax partner at PwC, expected long-term gains to retain favourable CGT treatment – and noted that the new regime for offshore funds introduced last week will make it easier for clients to make long-term investments in a range of asset classes and obtain CGT treatment.

Patricia Mock, director at Deloitte said: “Many clients are expressing an interest in property, or art and antiques with a view to generating capital rather than income taxable gains, ”

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