Investors are being warned to make sure that they have used up their annual capital gains tax (CGT) allowance before investing in offshore products.
Advisers say many investors are failing to use their annual £10,100 CGT allowance at all, while some have been wrongly advised to buy offshore bonds instead.
Offshore bonds have become particularly attractive for wealthy investors since the top rate of income tax rose to 50 per cent last April for those earning over £150,000 a year.
These tax wrappers, which hold underlying mutual funds, allow income tax to be rolled up and paid when the bond is encashed. While the bond is held, up to 5 per cent a year can be withdrawn with no immediate tax payable.
Many high earners have been using the bonds in the expectation that the 50 per cent tax rate will be removed, or that they will be basic-rate taxpayers when they retire and encash their bonds.
But John White, head of financial management at RSM Tenon, the adviser, says that many new clients he sees have been advised to buy offshore bonds without first using their capital gains tax allowance.
He says it is likely to be the fault of lazy financial advisers who prefer to avoid the hassle of using up CGT allowances each year.
“There’s no doubt that it’s more complicated to manage the buying and selling of investments in order to capture the gain, so you either need a good tax system or a hands-on adviser – but if you buy a bond you can forget about it for 20 years,” he says.
He also warns that encashing the bonds early creates an instant charge-able gain that many people may not wish to pay. “Don’t rush into vehicles that appear easy and get rid of tax issues like offshore bonds because, once you’re in them, they’re very hard to get out of,” he says.
For those looking to use their £10,100 CGT allowance before the end of the tax year on April 5, wealth advisers suggest the following steps:
●Transfer gains between spouses to use up your allowances
Jane Sydenham at Rathbones says that if you want to realise gains above your own personal allowance, you can transfer assets into your spouse’s name without incurring tax and use up his or her personal allowance too. A married couple can therefore realise gains of £20,200 in one tax year, tax-free.
●Make a note of your losses
While your CGT allowance has to be used up each year and cannot be carried forward, you can carry forward losses for as many years as you wish, to set them against gains this year.
But Sydenham says it is often the case that clients forget to keep a record of their losses.
Hannah Edwards at BRI Asset Management says that you should also stagger your losses so that you don’t under-use your CGT allowance.
If you want to sell a loss-making investment but the loss this year would mean you are not using your full allowance for gains made on other investments, you might prefer to stagger the sale across different tax years.
●Choose when to offset your allowance
Unusually, CGT rose in the middle of this tax year from a flat rate of 18 per cent to 28 per cent for higher-rate taxpayers. But investors can choose which side of the date to offset their gains using their allowance. If you are on the cusp of paying higher-rate tax and your gains would push you into the 28 per cent bracket, Edwards says you might be better off offsetting your allowance against gains realised after June 22.
●Don’t sell just for tax reasons
“It has to be clear that the benefit of the gain exceeds being out of the market or in an investment you really like,” says Sydenham. “That should be the overriding criteria of any CGT planning.”