09.a - Tax

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Golden

RulesofInvestInG

lesson:Tax:

An investors guide

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InvestoRschRonIcle.co.uk

GOLDENRULES OFINVESTINGMake more of your money with our

FREEguides

INVESTORSchRONIcLE.cO.Uk

10partseriescontinues24SEpT22OcT2010

LESSONS TO cOLLEcT:

n LESSON 6:propertyFrom boom to bustand back again

n LESSON 7:commoditiesMaximum returns from

oil, gold and more

n LESSON 8:sharesValue vs growth - which

Strategy really works best

n LESSON 9:taxHow to protect your wealthfrom the Government

n LESSON 10:innovationDont miss out: Prot with

online trading

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Maike Currie

PERSONaL FINaNCE EdITOR

investors chronicle

Maike Currie

Maike Currie is part o

ICs personal nance

team. She started her

journalism career in

South Arica. On moving

to the UK she joined

Financial Adviser, a title

serving the UKs IFA

market, later joining IC.

lesson 9TaX:

An investors guide

Golden Rules of InvestInG:LeSSON 9

Almost a thousand years ago,

according to the Anglo Saxon

legend, Lady Godiva rode

naked on a horse through the

streets ollowing a wager with her hus-

band. Thanks to her eorts the people

o Coventry were relieved rom an oner-

ous tax burden. Today, the chances

that a brave, naked lady on a horse will

save investors rom the impending tax

onslaught are probably as slim as the

chances that taxes wont be raised in

the near uture.

In the wake o the credit crunch, and

the subsequent spending programs to

get the economy back on the move, the

UK government is aced with a moun-

tain o debt, and a huge budget decit.

Pushing up taxes to help plug the holein the countrys nances is a certainty.

But even beore ocial announce-

ments that the UKs recovery package will

be unded, in part, rom tax increases,

investors had to consider how much risk

they wanted to take on the tax ront.

Throughout Investors Chronicles

150-year history, we have advocated

the view that tax considerations should

never drive your investment decisions,

supporting the old investment adage

o not allowing the tax tail to wag the

investment dog. However, we have

maintained that bespoke tax planning

driven by the right nancial consid-

erations can play an important role in

your investment return. It could be the

dierence between a net return o 72

per cent i capital gains tax is payable,

50 per cent i income tax is due, or 100

per cent i the investment is held in an

individual savings account (Isa). Thisguide brings together the tax planning

strategies and vehicles most pertinent

to the investor.

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4


death, taxesand a GapInG hole

It was Benjamin Franklin who

amously said: The only things

certain in lie are death and

taxes. Some lesser-known

mortal expanded the quote a bit ur-

ther with the words: Death and taxes

may be certain, but we dont have to

die every year.

As much as it is detested, disliked

and shunned, tax is an unavoidable act

o adult lie and a major concern to theinvestor. Making sure you arrange your

investments in the most tax-ecient

manner is a crucial part o getting the

maximum return rom your portolio.

Another, more pertinent reason

why investors, now more than ever,

need to make sure they do not pay

more tax than they have to is govern-

ment debt. The nancial crisis o 2007

and 2008 saw governments across the

world, and in the UK in particular,

launching astronomical spending

programmes to get economies back

on the move. This has let

a gaping hole in the coun-

trys nances in the orm

o an astronomical budget

decit. According to

the National Oce o

Statistics, in 2009 the

UK recorded a generalgovernment decit o

159.2bn, which was

equivalent to 11.4 per

hiddeN LiabiLiTieS

The pubLiC purSeCOuLd faCe 4.84tr

We are grippedby a crisis, andits the worstkind its invisi-ble. You cant seethe debts mount-ing up. Walkthe high street,go to work, talkto your riends,you wont seethe signs o ourdebts or our

defcit.

NICk

CLEgg

cent o gross

domestic prod-

uct (GDP).

To get this

mountain o debt

back to an accepta-

ble level, the govern-

ment will need to cut

spending and increase

its revenue. The latter

is done by raising taxes.We have already seen

dividend tax rates rise

to 42.5 per cent and the

This time noteven Lady Godiva

can save us

Benjamin Franklin amouslysaid the only things certain in

lie are death and taxes

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5


CurreNT

NeT debTfigure

935bn

introduction o a new super income

tax band o 50 cent. capital gains tax

rates have gone up to 28 per cent or

high earners, while national insurance

(NI) and value added tax (VAT) are also

set to increase next year. A clampdown

on tax evaders has urther been noted

as top priority, and HM Revenue &

Customs (HMRC) is increasingly put-

ting the spotlight on the tax matters o

the sel-employed, entrepreneurs, non-domiciles and high-net-worth individu-

als. Never has it been more important

to get your tax planning right.

FINdINg THE MONEY

The government intends totackle the decit partly throughincreased taxation and partlythrough cuts in public expendi-ture, o which about 20 per centwill come rom tax increases.To increase the tax take, thegovernment must ultimatelyrely on raising more rom thethree big taxes income tax,national insurance and VAT. A

VAT increase to 20 per cent,to take eect rom January

2011, will raise about 12bna year. The coalition govern-ment has also stuck in largemeasure to the tax increasesplanned by the previous Labourgovernment, in particular, the50 per cent top rate o incometax, restriction on tax relie onpension contributions and theremoval o individual personalallowances above an income o100,000 per annum. It has alsobeen announced that 900mwill be spent on rooting out taxevasion, bad debts and crimewith a view to raising a possible7bn a year by 2014-15. But thisis not sucient to ll the decitand it seems inevitable that thegovernment will have to raisetaxes urther.

Source: Grant Thornton,Smith & Williamson

Income tax

34%

National Insurance

23%

VAT

17%

3 maIn tax

GeneRatoRs*

*As a percentage o the total taxtake. All fgures are approximate

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6


the dIffeRent typesof taxes

There are several ways in

which the government can

raise money rom taxes.

These include national insur-

ance, council tax, VAT and corpora-

tion tax, to name but a ew. However,

or the purposes o this guide, well

ocus on the taxes impacting investors

and their investments most directly.

Income taxIntroduced in 1799, as a means o

paying or the war against the French

orces under Napoleon, income tax is

today levied on your earnings. This

will include income rom employ-

ment, interest earned on your sav-

ings, rental income, pension income

and dividends (income rom shares).

Previously the UK had two income tax

bands: a basic rate o 20 per cent and a

higher rate o 40 per cent, dependent

CONTribuTiON Of

TOp 2% Of TaXpaYerSTO TOTaL TaX Take

30%

CgT: gOvERNMENTS juST CaNT LEavE IT aLONE

1965

1971

1982 Criticism o CGT which gave no

allowance or infation whencalculating the

gain chargedto tax leads toChancellor Sir

Georey Howeintroducing an

indexationallowance

1988 Conservative government

introduced a charge toincome tax on certainshort-term capital gains orchargeable assets acquiredor sold ater 9 April 1962.

This applied to land ownedor ewer than three yearsand other assets owned orless than six months.

CGT introduced oncapital gains accruingater 5 April 1965, xedat a fat rate o 30per cent

Chancellor othe Exchequer1971 Anthony

BarberChancellor SirGeorey Howe

Income tax chargerepealed by theincoming Conservativegovernment

Income tax was introduced asa means to beat Napoleon

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an asset is held and dierent rules

applied or dierent assets.

Most recently, Chancellor George

Osborne introduced a new CGT rate

o 28 per cent or higher earners in

his June Emergency Budget speech.

For basic-rate payers CGT remained

at 18 per cent. The CGT threshold

per person (the maximum amount

o prot or which you dont have to

pay CGT) remained 10,100 or indi-viduals and 5,050 or trusts. Lucy

Hardwick, a director in the private

clients practice at Deloitte, points

out two important points oten over-

looked when it comes to CGT: First,

CGT is always computed in sterling

so beware o currency fuctuations

which result in gains and losses.

Secondly, remember that while ster-

ling cash is an exempt asset, non-

sterling deposits are chargeable.

1 in 131on your earnings. However, in April

2009, the then chancellor, Alistair

Darling, announced a new super tax

band o 50 per cent income tax on

anyone earning over 150,000.

capItal GaIns taxCapital gains tax (CGT) is the tax

charged on investment prots and

is typically payable on the sale o an

asset such as shares, securities andinvestment property. It is calculated as

the dierence between sale proceeds

ater selling costs and the original

cost. CGT is less than 50 years old but

since its inception in the 1960s, the

regime has been changed a number

o times. Its been at the same rate as

income tax, lower than income tax,

infation allowances introduced, infa-

tion allowances withdrawn, taper

relie given according to the time

1998

2008Finance Act 1998

introduced signicantchanges to CGT whichincluded the withdrawalo indexation allowance,

phased withdrawal o

retirement relie andintroduction o taperrelie.

1988 Nigel Lawson abolishes the

fat rate, aligning CGT withincome tax. Gains werecharged at the individualsmarginal rate o income tax sothe maximum

rate was40 per cent.

George Osborneannounces a 28 percent CGT charge or

higher rate taxpayersor post 22 June2010 capital gains.

Entrepreneursrelie is increased

Heres the truth,the proposed toprate o incometax is not 50 percent. It is 50 per

cent plus 1.5 percent nationalinsurance paidby employeesplus 13.3 percent paid byemployers.Thats not 50%

aNdREw LLOYd

wEbbER

2010Withdrawal o taper

relie and introductiono a fat rate o CGT o 18per cent. Introduction oentrepreneurs relie.

GordonBrown

Chancellor o theExchequer GeorgeOsborne

Chancellor o theExchequer Nigel Lawson

TaXpaYerS

had TO paYCgT iN 2009

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o the inheritance you leave or your

nearest and dearest but there are a

number o IHT-ecient investments

such as equities listed on the Alternative

Investment Market (Aim), armland, or-

estry and business assets.

stamp dutyStamp duty applies mainly to pur-

chases o shares in UK companies.

The rate o tax is xed at 0.5 per cent,

except or special transactions usu-

ally entered into by overseas investors

involving intermediaries where the

rate is 1.5 per cent.

Stamp duty land tax applies to pur-

chase o residential property over125,000 and to commercial property

over 150,000. It accounted or 4.8bn

o government revenue in the 2008-09

tax year. The rate o tax varies depend-

ing on the amount o the purchase

price, rom 1 per cent to 4 per cent,

explains Sean Randall, a director in

Deloittes tax practice. But note that

the top rate or residential property

will increase rom 1 April 2011 to 5 per

cent or purchases over 1m. Buyers

o 1m-plus homes will pay at least

10,000 more in tax rom next year. It is

estimated that 10,000 to 15,000 buyers

will be aected... resulting in a spike in

sales o 1m-plus homes in the run-up

to April 2011.

STaMp duTY

CONTribuTiON TOgOverNMeNT reveNue

2008 2009 3.2bnThe decisionto reeze thenil rate bandreinorces the

basic planningopportunities orIHT by makingull use oexemptionsand relies.RICHaRd

MaNNION

InheRItance taxDescribed by some as the tax every-

one aspires to pay, inheritance tax

(IHT) is paid on a persons estate at

40 per cent i the total assets on death

exceed 325,000 (this is your lietime

tax-ree allowance, also called the nil-

rate band). Married couples and civil

partners have a transerable allowance.

This means when one partner dies, the

other can add to the deceaseds allow-

ance giving couples an eective lie-

time allowance o 650,000.

The Conservative election mani-

esto included a pledge to raise the

IHT nil-rate band to 1m per person

but clearly that wasnt going to be arunner at this stage o an economic

crisis... the decision to reeze the nil-

rate band reinorces the need to make

use o the basic planning opportu-

nities or IHT by making ull use o

exemptions and relies, comments

Richard Mannion, national tax direc-

tor at Smith & Williamson.

IHT can take a nasty chunk out

8

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peOpLe ShariNg

iNheriTaNCe Ofaverage eSTaTe

5tax BandsIncome tax

Basic rate

1-37,400

Higher rate

37,401-150,000

Top rate

Over 150,000

stamp duty & stamp duty land tax

capItal GaIns tax (cGt)

InheRItance tax (Iht)

1-325,000

0%or individuals

Over 325,000

40%or individuals

1-650,000

0%married couples/

civil partners

Over 650,000

40%married couples/civil partners

10% 20% 20%

32% 40% 40%

42% 50% 50%

Dividends Savings Other

Up to125,000

0%

125,000-250,000*

1%

250,000-500,000

3%

Over500,000

4%

*Until 25 Marchresidentialproperties upto the valueo 250,00oare exemptrom stamp

duty land taxor rst-timebuyers

Basic rate 18%

Higher rate 28%

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tax-fRee Investments

The number o investments

that are completely tax-

ree are limited to premium

bonds, national savings &

investment certicates (15,000 per

issue, although these are currently

suspended rom sale) and childrens

bonus bonds (3,000 per issue).Certain collectors items such as clas-

sic cars, coins and certain personal

chattels, depending on their value,

The Year The LONdON

MiNT firST STarTedprOduCiNg COiNS

are also exempt. Individual sav-

ings accounts (Isas) are sometimes

considered to be tax-ree invest-

ments. However, withholding taxes

on dividends cannot be recovered.

For income tax purposes it means

that they are on equal ooting with

other equity-based investments inthe hands o individuals who pay at

the basic rate, says Mike Fosberry,

director at Smith & Williamson.

886

Certain collectors items such as classic cars are exempt from tax

Assetsconsidered

depreciatingin value are ree

rom CGT

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aMOuNT eiSs

COST TheeXChequer a Year

190mtax-effIcIent Investments

The old adage a tax deerred

is a tax saved is as true today

as ever. There are a number

o tax-ecient investments

that can help you save tax, and most

tax experts advise that you make use

o these while they are still in place.

IsasYou wont be able to recover with-

holding taxes on dividends within

an Isa, but you will not have to pay

CGT. You can save up to 10,200 tax-ree, o which 5,100 can be held in

cash and the remaining 5,100 can

be invested in stocks and shares with

either the same or a dierent provider.

Alternatively, you could invest your

entire allowance into a stocks-and-

shares Isa. A couple making regular

use o their yearly Isa allowance can

accumulate a sizeable pot which

could be used to supplement their

retirement income later in lie.

pensIonsPensions attract upront tax relie. For

most people, this tax relie is available

at their marginal rate o tax. Taking

advantage o this tax subsidy could

Isa alloWances

Cash Isa Stocks & shares Isa Overall Isa allowance5,100 10,200 10,200

boost the return on your pension

und by up to 40 per cent (or those

with income o less than 150,000).

Your pension und can grow almost

entirely ree o tax, and 25 per cent can

be withdrawn tax-ree once you start

drawing down your pension.

eIs & vctsEnterprise investment schemes (EIS)

and venture capital trusts (VCT) are

higher-risk investments with gener-

ous tax breaks. You can get 20 percent income tax relie on a qualiying

EIS investment up to 500,000 (which

equates to a reduction in your income

tax liability o up to 100,000). Ater

three years you can sell the shares

completely ree o CGT.

Tax relie is available at 30 per cent

on a VCT investment up to 200,000.

VCT dividends are tax-ree and the

investment can be cashed in tax-ree

ater ve years.

Angela Beech, partner at account-

ancy rm Blick Rothenberg, says that

VCTs are high-risk investments, but

adds that: The und is quoted on the

stock exchange and investors may sell

at any time.

It was as true...

as taxes is. And

nothings truer

than them.

CHaRLES dICkENS

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tax shelteRInGInvestments

Tax shelter investments

allow you to deer

your tax liabilities

until a later time as

well as sometimes giving you a tax-

ree element, explains Mr Fosberry

at Smith & Williamson. Typically such

investments roll-up ree o all taxes

until they are encashed.

offshoRe InsuRance BondsI you invest via an oshore investment

bond the investment return can grow

tax-ree until you encash the bond.

aMOuNT Of TOTaL TaX

reCeipTS hMrC faiLS TOCOLLeCT eaCh Year

10%Since the rst tax amnestyin 2007 the OshoreDisclosure Facility taxpay-ers with undisclosed incomeand capital gains have beenoered a number o opportuni-ties to come clean to HMRC.The purpose o campaignssuch as the LiechtensteinDisclosure acility and otherswas to encourage taxpayersto pay their outstanding taxliabilities along with interestor late payment and a xed

10 per cent penalty.Recent comments suggest

that the government will ocusurther attention on trying toreduce tax evasion and taxavoidance. It is, however,important to distinguishbetween the two, as LouiseSomerset, tax director at RBCWealth Management explains:Tax evasion involves breakingthe law and clearlyshould be stampedout. Tax avoidanceis simply arrangingones aairs inorder to legitimatelyreduce the taxburden.

Tax EvaSION

vS Tax avOIdaNCE

Shelter your investments from the impending tax storm

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aMOuNT gOvT

hOpeS TO raiSe frOMTaX CraCkdOwN

7bn

UK-based insurance bonds will have

their investment income and growth

taxed at a rate o between 15 per cent

and 20 per cent a year. You can also

withdraw tax-ree cash each year up to

5 per cent o your original investment,

and i this allowance is not used in any

one year, it can be carried orward.

maxImum Investment plans& endoWmentsMaximum investment plans and

endowments are regular premium

insurance policies. Provided premi-

ums are paid or at least 75 per cent

o a 10-year term and they do not vary

within specied limits, tax is limited to

insurance company rates o between15 per cent and 20 per cent. There is

no urther higher-rate tax to pay on

encashment, explains Mr Fosberry.

Tax planning is increasinglyabout using the statutory reliesand annual exemptions,comments David Kilshaw oaccountancy rm KPMG. Thereare a number o allowances youcan make use o to lighten yourtax load some o the mostimportant are listed below:

cGt All taxpayers, including

children, have an annual CGTexemption o 10,100.

Planning point: Transers oassets between spouses are notsubject to CGT, so assets can betranserred between spousesto ensure each spouses CGTallowance is used. Entrepreneurs relief affords

a 10 per cent tax rate on therst 5m o capital gains i yousatisy certain criteria.Planning point: Read thesmall print. You can qualiyor entrepreneurs relie i

you own 5 per cent o theunquoted trading company

you work or but not i youhave less. So a 4 per centshareholder should try toraise his holding to the levelo the threshold.

Income tax Everyone has a tax-free

personal allowance o 6,475.Planning point: I one spouse

is not a higher-rate taxpayer,income-producing assets canbe transerred to that spouse.He/she can use their personaltax allowance and basic rateband to reduce the jointincome tax rate.

InheRItance tax Certain gifts out of income

can be exempt rom IHT.Planning point: Assets gitedmore than seven years beoredeath escape IHT, provided

the donor does not benetrom the git, explains MsBeech o Blick Rothenberg. Forexample giving shares to a sonor daughter who use the annualdividend to pay or repairs totheir parents home would becaught, as the parent could bedeemed to still own the sharesor IHT purposes.

pensIonsEvery person can contribute

up to 2,880 per year into apension, which will be topped upwith basic-rate tax relie rom thegovernment up to a maximumannual allowance o 3,600.Planning point: Contribute intoa sel-invested personal pen-sion (Sipp) or your child by

putting away 2,880 each year,your child could end up with apension pot well in excess o2m when they reach age 65.

Tax aLLOwaNCES aNd RELIEFS

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14

TaxPLaNNINgCHECkLIST

MakeyourloSSeSworkforyouInvestorscanmakelosses,aswellasprots.Maximisetaxbreaksonyourlosses.Capitallosses,orexample,canbeosetagainstyourcapitalgainsromthesameoruturetaxyears.

GetyourtIMINGrIGhtInvestorsthinkalotaboutwhentosellorbuy,butasDavidKilshawoKPMGpointsout,timingisequallyimportantintaxterms.Iyousellanassetataproton5April2011youhavetopayyourtaxbillon31January2012.Delayyoursalebyadayto6Aprilandyouhaveanother12monthstopayyourtaxbill.

MaINtaINflexIbIlItyThetaxlandscapecouldlookverydierentwhenyourinvestmentcomestoruition.Stayfexible.

GetadvICeSpeaktotheproessionals.Itmightcostyoumoneyupront,butitcouldsaveyouapacketinthelongterm.

kNowyourreaSoNNevermakeaninvestmentpurelyortaxpurposesdontletthetaxtailwagtheinvestmentdog!

keepyoureyeoNtheballTaxrulechangesrapidly,andcon-tinually.Ascloselyasyoustudytheinvestmentmarket,youshouldstudythetaxmarket.

doSIMplethINGSfIrStFamiliesshouldmakeuseopersonalincometaxandinheritancetaxallow-ancesandspreadthetaxburden.MakeuSeoftax-ef

fICIeNtINveStMeNtSMakeuseoIsas,pensions,EIS,VCTsandoshorebonds,butonlyithesetinwithyourinvestmentstrategy.

INveStforCapItalGrowthCurrently18percentor28percentCGTisbetterthan20percent/40percent/50percentincometax.Makeuseothiswhileitsaround.kNowwheNtoGooffShoreForUK-domiciledandresidenttaxpay-ers,littleornotaxcanbesavedbyhavingcashoshore.However,iyouareanon-domicileandliveintheUK,youcanbenetromtheremittancebasisotaxation.

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Golden Rules of InvestInG:LeSSON X

15

puT uSefuL

iNfO up hereOr STaTS

13.3%

GOLDENRULES OFINVESTINGMake more of your money with our

FREEguides

INVESTORSchRONIcLE.cO.Uk

10partseriescontinues24SEpT22OcT2010

LESSONS TO cOLLEcT:

n LESSON 6:propertyFrom boom to bustand back again

n LESSON 7:commoditiesMaximum returns from

oil, gold and more

n LESSON 8:sharesValue vs growth - which

Strategy really works best

n LESSON 9:taxHow to protect your wealthfrom the Government

n LESSON 10:innovationDont miss out: Prot with

online trading

7/29/2019 09.a - Tax

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Documents

09.a - Tax