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A mix of policies can be used to protect against a range of eventualities:. Some can be combined with investment elements. Using the right combination makes them more cost-effective.

Capital Gains Tax Angles

It is estimated that if the average person works from 1 January each year it will be May before they have earned enough to pay their Income Taxes*.

Quite a thought, isn’t it?  So it makes sense to buck the average and take whatever steps possible to keep more each year for yourself.

For instance, most people don’t make full use of their allowances, the Capital Gains Tax allowance, which is regularly neglected, is a good example.

We can each receive £10,100 in capital gains every year without paying a penny in Capital Gains Tax.  For a married couple, this is £20,200, every year!

For most of us this means reviewing your shares and other investments and selling sufficient to use your allowance each year.  The assets don’t even have to belong to you.  If you are married, you can transfer assets in your name to your husband or wife (or civil partner) without having to pay CGT and they can then use their allowances as well.

Capital gains released in this way can be spent as extra ‘income’ or reinvested but there are some reinvestment rules to watch out for.  A neat way to double up on your allowance is to sell assets up to the CGT allowance, currently £10,100, and then reinvest the proceeds into an Individual Savings Account (ISA).  Sometimes called the ‘Bed and ISA’ approach it uses your current CGT allowance to save tax today and the ISA allowance to save tax in the future.

In an ISA, all gains are tax-free and you don’t have to pay any further Income Tax.  There is no need even to declare an ISA on your Tax Return.

With Income Tax rates at up to 50% (and National Insurance on top in some cases) compared to Capital Gains Tax at just 18%, even if you exceed the CGT threshold, the rate of tax you pay is much lower.  Unquestionably, assets which are taxed under the CGT rules as opposed to Income Tax rules, therefore, are increasingly coming under closer scrutiny and may be worth a closer examination by us all.

However, using annual allowances and a thorough review of investments requires due procedure and discipline otherwise opportunities will be lost.  A regular system operating to sensible priorities and an overall plan is something which is important to consider and implement before any action is taken. 

This approach is not for everyone though.  Assets subject to CGT are often more risky and/or have to be held for longer for gains to materialise.  Naturally, the risk could mean that such assets don’t produce gains but losses instead. An unpalatable fact which must be borne in mind. 

Taxation benefits are one aspect of a larger suitability question which can only be answered by looking into your personal circumstances in conjunction with a suitably qualified and regulated adviser.

* Source: Adam Smith Institute

This article represents our interpretations of current and proposed legislation and HMRC practice as at the date of publication. This may change in the future.

Finesco Financial Services Limited is authorised and regulated by the Financial Services Authority.