It is inevitable that chancellor Rishi Sunak will being making some tax reforms in the next budget to pay off coronavirus debts and high net worth (HNW) individuals in the UK are already preparing to combat the changes.
Brokerage firm Wealth Club has surveyed over 800 HNW clients and found 61% are concerned about a potential increase in capital gains tax, which comes after the Office of Tax Simplification (OTS) published a report dedicated to CGT to help the UK government make reforms.
Some 59% are worried about a rise in income tax, and others are also anxious about inheritance tax (58%) and dividend tax (50%) hikes.
Due to these feared tax rises, over half (52%) have, or are planning to, put more of their wealth into investments that offer tax relief and a further 18% are also now deciding whether to increase the amount of tax-efficient investments they have.
Andrea Jones, tax, trusts and estates partner at Irwin Mitchell, said: “With the likelihood of an impending increase in taxes, it is not surprising that over half of UK high net worth individuals are looking to put more of their wealth into investments that offer tax relief or to increase the amount of tax-efficient investments they have.
“There is a balance between the tax advantage and the investment risk which is often referred to by the phrase ‘Don’t let the Tax Tail wag the Investment Dog’, as it might be tempting to focus entirely on the tax advantages but overlook the investment strategy and longer term plan.”
Good opportunity
Rachael Griffin, tax expert at Quilter, added: “Many investors will be worried about how the new recommendations the OTS have made in relation to CGT will impact their wealth. However, the changes could create a good opportunity for advisers to tweak financial plans to help accommodate any changes.
“The main message advisers should be communicating to their clients is that it is important to use your allowances and exemptions now or risk losing them. Maxing out ISA and pension contributions are likely going to be the first port of call.
“Advisers should be particularly focused on managing their client’s gains (and losses) and not letting them build up. The annual exemption uses the concept of use it or lose it, so gains should be managed each year to avoid them being realised in one go. CGT doesn’t benefit from a top slicing relief equivalent (annualising the gain) so letting them build up is common and unnecessary.
“The change in rules also make single premium investment bonds an attractive tool for clients particularly in relation to estate planning because changing assets within a bond is not classed as a disposal for CGT purposes.
“This holds true for both onshore and offshore bonds. An additional benefit for bonds is there is no limit on investment size. These solutions could therefore represent a very useful option for a client depending on their unique circumstances.”
Increase attractiveness
Gerry Brown, tax consultant at QB Partners, said: “It seems clear that the OTS report will result in some increase in the government’s CGT take; the favourite strategy seem to be to increase the rates at which CGT is charged to bring them into line with income tax rates.
“However, the report goes much further and looks at the effectiveness of some reliefs. It advocates a significant tightening of the requirements to qualify for Business Asset Disposal Relief, formerly Entrepreneurs’ Relief.
“It seems clear that investment in vehicles such as VCT, EIS and SEIS follow government policy – tax relief should be targeted at the time an investment is made rather than when that investment is realised. This will significantly increase the attractiveness of such vehicles.”
Neil Jones, tax and wealth specialist at Canada Life, said: “Investors concerned about capital gains tax have a number of options available to them, VCTs and EISs being two, however investment bonds can also remove an investment from capital gains tax altogether.
“These are investments written under a life assurance policy and the gains are subject to income tax, not capital gains tax. They do not have to adopt the riskier investment strategies associated with VCTs and EISs.
“An investor is able to construct a portfolio held within a bond and the tax benefits mean that the portfolio can increase in value with tax deferred until any gains are taken from the bond. When gains are taken these can be spread over the number of years the gain has been made over, all based on the investor’s tax position at the time of realisation.”
