The Naked Investor: Time for re-think on investments
Now that the Government's pre-Budget bombshell has had time to sink in, and assuming the Chancellor makes no further changes to his proposals before April 8, this might be a good time to pause and consider the effects of the changes on investments.
I'm sure most of you are aware of the reasons behind the changes to capital gains tax (CGT), ie the Government's desire to ensure that private equity investors pay more than 10% tax on their investments.
But setting aside whether this was a good idea or not the changes have given rise to extensive consequences.
The largest group to be hit is the business sector who, when they want to dispose of business assets, will now pay an extra 8%.
Following the howls of protest from the business organisations that came together in a rare moment of cohesion to protest, the Chancellor has made one concession: he has allowed the first £100,000 to be tax-free, which for those with longer memories harks back to the old 'retirement relief'.
This extra tax on such disposals will cause many to sit down and look at what strategies they can use to reduce the effects of this tax increase.
Another group to be affected will be employees who have been putting their £20 per month, or whatever, into Save-As-You-Earn schemes. They will now have no incentive to hold on to any shares once an option date has been reached and this will again cause many headaches for directors of the larger business concerns.
But what about private investors?
Have the rules made any difference at all to how much tax they pay or, more importantly perhaps, has it made any difference to where they hold their investments?
Certainly any investments made in order to benefit from business taper relief and the 10% tax, and due to mature after April 8 next year, are going to cost an extra 8% off any profit.
For those non-business asset disposals the decision will be a question of trade-off.
For a higher rate taxpayer, post April 8 the tax will be 18% no matter how long the asset has been held and even with full non-business taper, which reduced the effective rate to 24%, such investors will be better off waiting - unless they are simply exercising the use of the annual allowance.
For basic rate taxpayers, it is not quite so good. After four years on the existing scheme the rate would be 18%. So, if you have held an asset for longer than this - say 10 years - you may want to consider your position as your effective rate would be 12%.
The next area of importance for all investors is the question of whether to use unit trusts or insurance bonds.
Setting aside the income aspects for a moment, a basic rate taxpayer will face tax on an on-shore life assurance bond of 20% but only 18% on a unit trust.
For higher rate taxpayers it is 36% on a bond and 18% on a unit trust.
So on the surface of it, higher rate taxpayers will be better off in a portfolio of unit trusts.
But if you need an income, it is not quite so simple.
Investors will have to weigh up the benefits of tax-deferred withdrawals during their lifetime with income tax paid on full encashment versus income tax during lifetime and CGT on disposal (unless held until death when CGT falls away).
Put simply, you get the 5% tax-free deferral in a bond, which does not need to appear on your tax return and does not affect your age allowance but, if you fully encash, then you face a potential income tax bill.
With unit trusts you can get an 'effective' tax-free income by using your CGT annual allowance each year to do the same thing.
Higher rate taxpayers need to remember that dividends on unit trusts are subject to 32.5% income tax, whilst basic rate taxpayers pay 10%.
In conclusion, there is a great deal to mull over here on the way that you hold investments and how, if any, income is arranged. It will pay to take a hard look and then make changes only if they match your financial goals both in the short and medium term.
If you need any help you can contact me via www.realwealthman agers.co.uk.
Nicholas Watts is an independent financial adviser with Positive Solutions Financial Services, which is regulated by the Financial Services Authority.