The new Labor leader will begin raising taxes on investors and business owners, threatening to curb the entrepreneurial spirit that drives the economy.
Capital gains tax, inheritance tax and national insurance have all been targeted this week, with thresholds frozen or spectacularly increased.
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The main concerns for most investors will be increasing capital gains tax, disrupting inheritance tax relief for AIM shares and making pensions subject to inheritance tax.
However, while this tax change is shocking, smart investors still have a variety of options to protect their savings from the tax man.
ISA and SIPP
The obvious place to start is to use ISAs and pension facilities to protect your investments from capital gains tax. Investors have an ISA allowance of up to £20,000 and can put 100% of their income, or up to £60,000, into a SIPP each year.
Thankfully these were left unchanged by the Prime Minister. Ideally these would have been increased to encourage investment and smart savings, but this was not a budget for investors.
“The tax breaks given to pensions and ISAs survived the Budget, with the exception of the generous tax treatment of pensions on death. In particular, investments held within pensions and ISAs are not subject to capital gains tax. and the dividends they generate are not subject to income tax,” said Rais Khalaf, head of investment analysis at AJ Bell.
“The rise in capital gains tax, especially when combined with the CGT allowance of just £3,000 a year, means investors should prioritize pensions and ISAs if they want their investments to grow.”
Mr Khalaf went on to explain the tactics of ‘bed and ISA’ or ‘bed and SIPP’ which can bring investments into tax wrappers to protect them from future capital gains taxes.
“People who hold unwrapped investments can move them into a tax shelter by carrying out an operation known as a ‘bed and ISA’ or ‘bed and SIPP’. As this involves the sale of the asset, there may be a capital gains tax liability at this point, but investors can reduce this by using the £3,000 annual CGT allowance wisely. ”
“Once you go into a SIPP or ISA, no further profits are taxed. Using this approach you can save up to £3,000 a year in CGT. Investors who feel they may violate the quota may consider selling a combination of profitable and loss-making investments, where losses can be used to offset gains. It reduces your capital gains tax liability and you can then repurchase either or both investments within the ISA to avoid tax on future gains.”
Unfortunately, pensions will now be included in a person’s estate for IHT purposes, so those wishing to protect their portfolio in the event of death will need to consider alternative assets.
EIS and VCT
Long-term, experienced investors may want to consider VCTs and EISs. Although the system offers generous tax incentives for investing in early-stage companies, it carries much higher risks than listed stocks.
The Chancellor announced that the scheme will be extended until 2035, signaling much-needed certainty for investors who use the scheme to protect their investments from IHT and EIS.
“At a headline level, venture capital trusts were unaffected by the budget. Investors continue to enjoy up to 30% upfront income tax relief, as well as dividend and capital gains tax (CGT) relief. ” says Nicholas Hyett, investment manager at Wealth Club.
“However, in relative terms, the plan has become significantly more attractive. With income tax thresholds frozen for years to come and CGT rising, the possibility of a tax-free return becomes even more attractive. ”
EIS provides investors with full income tax, CGT and IHT exemptions if they hold unlisted shares for more than three years. However, the Budget limited the level of investment provided free of charge from IHT to the £1 million allowed within the Budget.
“As shares in unlisted companies, EIS qualifying investments are eligible for Business Relief (BR). This previously meant that any amount invested in an EIS could be passed on without Inheritance Tax (IHT) “From now on, investors could face a 20% IHT charge on their EIS investments if they already have £1m of BR eligible investments,” Mr Hyett explained.
“However, for retail investors, EIS is probably high on the list of investments worth considering.CGT free growth is now more attractive, and in a high tax world CGT deferral is worth more than 30%. Throw in upfront income tax relief and wealthy and sophisticated investors will definitely need to spend some time exploring this sector. This is great news for investors, and could potentially allow them to raise large amounts of capital at low costs.”
