Changes proposed to the Capital Gains Tax (CGT) rules by the Chancellor of the Exchequer Alastair Darling in the Pre-Budget Report last October could have significant implications for some clients if they enter force.

The new rules, if they are ratified, will come into force after 5 April 2008. They could mean that the potential liability to CGT on any investments you plan to sell increase significantly, depending on how long these investments have been held.

Currently, any gains made on the sale of investments and/or assets that would be subject to CGT can be reduced by:

• Indexation relief (inflation-proofing) for the period of ownership from March 1982 through to 5 April 1998, and
• Taper relief based on the number of years the investment had been held since 1998 (Holders  of non-business assets qualify for an extra year’s taper relief if investments were held before 17 March 1998).

Any element of the net gain in the value of the assets after this calculation that exceeds an individual’s CGT allowance for the year of disposal will be chargeable at 10 per cent, 20 per cent or 40 per cent, depending on that individual’s total taxable income.  However, from 6 April 2008 both indexation relief and taper relief will have been abolished and  a flat rate of CGT of 18 per cent introduced. 

In practice, the CGT changes mean that:

• Basic rate taxpayers who have gains exceeding their annual CGT exemption but qualify for 10 years non-business asset taper relief will potentially pay, after 6 April 2008, 18 per cent tax instead of 12 per cent.

• Higher-rate taxpayers investing for less than three years with gains exceeding their annual CGT exemption will now pay 18 per cent as opposed to 40 per cent. Basic-rate taxpayers will pay 18 per cent tax instead of 20 per cent.

So, higher-rate and basic-rate taxpayers already using their annual exemptions and investing for less than three years will have an improved CGT position under the proposed rules. For both groups, the benefits will reduce the longer they have hold their investments, especially for the lower-rate taxpayer.

Clearly, there would be some winners and losers as a result of the proposed changes to the CGT regime. To find out precisely how it could affect you, then call or email your adviser for a consultation.

Please note that the information contained in this article only applies to non-business assets.

For more information, email or call us now.

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Many of our clients ask us when is the best time to buy into the stockmarkets or sell their existing holdings. What they want to do, of course, is to try and time their purchases or sales so that they buy at the bottom and sell at the top.

However, our answer is always the same. We believe it is almost impossible to outguess the markets and that any attempt to call the top or the bottom is likely to end in failure – and loss of your money.

Instead, it is our strongly held view that it is much more important to pay attention to asset allocation. Specifically, we believe it is important to ensure that you build up a diversified portfolio of investments which properly reflects your attitude to risk and reward and embraces a number of asset classes which may include equities, bonds, cash and commercial property.

Collective funds like unit trusts enable individual investors to enjoy greater diversification because they provide a share in a broad portfolio of assets. Diversification may also require spreading investments across a range of fund managers. This way you avoid putting all your eggs in one basket, both in respect of funds and fund managers.

There is sound logic for diversification. While experience shows that over the long-term equities have generally outperformed other asset classes, such outperformance cannot be expected to take place smoothly or in every year. There will inevitably be corrections and no single asset class should realistically be expected to dominate the performance tables all of the time.

Please note that the value of your investment may fluctuate over time and even go down. This type of investment should be seen as medium to long term. Investing in commercial property can carry additional risks where the money may be unavailable when required.

For more information on developing a diversified investment portfolio to suit your attitude to risk and reward, email or call your adviser.

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Inheritance Tax or IHT has become major source of revenue for the Exchequer. And given the following figures, it’s also become a significant voter issue over recent years:

• IHT revenue raised in 2006/07 was a record £3.6 billion, up £300 million (9 per cent) on 2005/06.
• In 2006/07, 33,000 estates are estimated to have paid inheritance tax, while in 1997/98 only 18,000 estates paid the tax.

Clearly, IHT is a tax which has a significant impact on many people. But with careful planning, it’s also a tax which you can potentially reduce considerably or mitigate.

However, changes announced by the Chancellor of the Exchequer Alastair Darling in his October 2007 Pre-Budget Report have raised concerns that many people may think it is no longer essential to plan carefully in the future.

In the Pre-Budget Report, the Chancellor announced that spouses and civil partners will be able to inherit any unused portion of their deceased partner’s IHT nil-rate band. (NOTE: The nil-rate band for inheritance purposes is the limit to which an estate will not attract IHT. Above this amount the beneficiaries estate can attract IHT at 40%. The portion of the estate that a living spouse inherits does not attract IHT.)

Prior to the Chancellor’s announcement each individual had their own nil-rate band. However, because inheritance transfers between spouses are exempt from IHT, if one spouse or civil partner left all of their estate to the survivor, then they effectively wasted their IHT nil-rate band.

What the new  rules do is to enable the survivor to add any unused portion of their deceased spouse’s or partner’s nil-rate band to their own. In practice, this means that the survivor’s nil-rate band could double to £600,000 if all of their deceased’s partner’s nil-rate band was unused.

While such a change is welcome, it is very important that couples do not get lulled into taking the false view that IHT planning has become less important. The fact is that the Chancellor has given nothing away that was not already available through the use of what are known as will trusts. In practice, thorough IHT planning is as important as ever.

For more information on the IHT changes and how they could apply to your particular circumstances, then email or call us now.

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If you have a private pension, then when you retire it’s likely that you will use your accumulated pension fund to purchase a pension income.

There are several ways of doing this but the most common is the ‘lifetime pension annuity’. This provides a guaranteed income which will be paid on a regular basis for the rest of your life.

The Open Market Option

There are several types of lifetime pension annuity. For example, index-linked (your pension income rises over time to reduce the effects of inflation or even mitigate it if the RPI index is chosen); and joint-life (your spouse receives a set proportion of your pension if you die).

Before you buy, however, it is vital to ensure that you select the annuity which offers the best value for money and the key is to remember that you do not have to purchase it from the same company that you originally bought your pension plan from. In fact, you have the right to exercise what’s known as the ‘Open Market Option’ or ‘OMO’.

By exercising the OMO you can search the entire annuity market. In some circumstances, doing this could add up to 30 per cent to your pension income each year for the rest of your life!

Impaired life and enhanced annuities

The impaired life or enhanced annuity is a variation on the standard pension annuity. If you have health problems that could reduce your life expectancy – e.g. you have heart disease, cancer, or have suffered a stroke – then some providers may offer an impaired life annuity which would provide a higher than normal income.

Even if you are just overweight, or smoke regularly, some companies may provide an enhanced annuity. Some companies also offer higher rates to people who have worked in certain occupations or who live in certain areas of the country, so shop around for the best deal.

Postcode annuities

In a recent development, at least one insurer (Legal & General) is market testing the concept of ‘postcode’ rated annuities to establish whether there are any benefits of using a customer's postcode as an additional factor in determining the amount of an annuity that can be bought.

Legal & General says there is evidence to suggest that where a person lives may actually influence their life expectancy. It says that by more accurately reflecting how long a person is likely to live then it may be possible to improve the amount of annuity income they can purchase.

Please note that a pension is a long term investment. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation. The fund value may fluctuate and can go down. Tax legislation can and may change in the future.

For more information about pension annuity purchase and the Open Market Option, email or call us now!

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Many clients may think that the government, with it’s insistence that inflation is only around the 2 per cent mark, is living on another planet!

For many of our clients, the actual rate of inflation they face is likely to be much higher.

Indeed, according to the latest Bank of England quarterly survey published in November, public expectations of inflation in the UK have reached the highest level on record. The survey shows that expectations of the annual inflation rate for 2008 jumped from 2.7 per cent last August to 3 per cent in November, the highest since Bank’s survey began in 1999.

One of the key reasons between the apparent disparity between the official figure for inflation and what most of us actually experience lies in the measure adopted.

Since 2004, the government has used a measure called the Consumer Price Index or CPI so as to allow a comparison with inflation in the rest of Europe. The CPI was 2.1 per cent in October compared to 1.8 per cent in September. The other main measure of inflation is the Retail Price Index or RPI, which rose to 4.2 per cent in October from 3.9 per cent in September.

The CPI excludes a number of items that are included in RPI, notably council tax and owner-occupier housing costs such as mortgage interest payments and buildings insurance. The two are also calculated differently which further reduces CPI relative to RPI.

Looking ahead, many commentators expect inflation to increase – by whatever measure is used to calculate it. The reasons they say are rising oil prices, wage inflation in China where most of the electrical and electronic goods we buy are now made, and the rising cost of such important raw materials as steel, copper and aluminium, caused by the massive demand from the rapidly industrialising economies of China and India.

Clearly, if you’re looking to make the most with your savings and stay ahead of inflation, you will maximise your potential to achieve this by investing in a portfolio of assets which comprises a mixture of equities, bonds and commercial property which has been put together to properly reflect your attitude to risk and reward. If you want to preserve the spending power of your savings, keeping your money in a deposit account may not be the most suitable option.

Please note that the value of your investment may fluctuate over time and even go down. This type of investment should be seen as medium to long term. Investing in commercial property can carry additional risks where the money may be unavailable when required.

For a no-obligation consultation on building an investment portfolio to beat inflation, then email or call your adviser now.

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