Tax bombshell or planning opportunity? - Veterinary Practice
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Tax bombshell or planning opportunity?

ANDREW NEALE believes it is time for a review of existing investment holdings

WITH the Public Sector finances struggling significantly as a result of the financial crisis it would appear as though generous and widespread tax cuts are unlikely to occur in the near future.

In fact, the announcement of a 50% income tax rate (42.5% for dividends) to apply from 6th April 2010 to taxable income in excess of £150,000 should motivate those likely to be affected to take some action sooner rather than later to plan how they may take advantage of any tax breaks available to them.

Against this backdrop of doom and gloom, however, it is fair to say that investors were pleasantly surprised when Alistair Darling announced generous increases to the ISA allowances in April’s Budget.

A massive 42% jump in the annual ISA limit from £7,200 to £10,200 (initially for the over 50s) meant that the Chancellor opened the door even wider to the tax breaks represented by investing in ISAs. This higher limit will be available to all ISA investors from 6th April 2010.

There are nowanumber of opportunities available for individuals and couples to minimise their overall tax liabilities by using investments, with ISAs being the most obvious example. Income from ISAs is generally tax free (although the tax credit on UK dividends cannot be recovered) whilst all growth is free of capital gains tax.

The increases highlighted above mean that couples can now shelter £20,400 every year, which certainly places the ISA closer to the heart of investment portfolio tax planning than ever before. No longer are they going to be seen as a useful but fairly insignificant part of the portfolio!

The ISA is still misunderstood by many investors who simply see it as an investment subject to higher risk fluctuations in value, instead of being a tax shelter for their existing savings and investments. Thus, an ISA can improve the returns of investments already held without increasing investment risk – the improvement simply comes from the preferential tax treatment when compared to other tax wrappers.

It is important to remember that the tax benefits of an ISA commence the moment an investment is made, which begs the question as to why so many people leave it so late in the tax year to invest? The benefits of regular saving shouldn’t be ignored either.


Whilst it is accepted that many couples will not be in a position to find a fresh £20,000 each year to take advantage of the Chancellor’s “generosity”, it shouldn’t be forgotten that monies held in other, less tax-efficient wrappers could be switched into an ISA. At the very least an investment review of existing holdings should therefore be considered.

A further consideration in terms of investing in a tax-efficient manner is to ensure that you invest in assets which give rise to capital gains rather than income.

The rate of capital gains tax (CGT) is now only 18% and every individual regardless of age is entitled to an annual exemption of £10,100 during the current tax year.

A suitable investment for this purpose would be a capital growth oriented collective investment, such as a unit trust or OEIC, meaning that capital gains of £10,100 each year are tax free.

Naturally, careful consideration would need to be given as to the risk profile of each investor to ensure that he or she is comfortable with the risks often associated with such an investment. However, a well-balanced and diversified portfolio can go a long way towards alleviating these perceived higher risks in any event.

Defer tax charge

It is also possible to invest in assets that defer the tax charge or additional tax charges. For example, UK investment bonds suffer an internal tax rate of a maximum of 20%, meaning that on encashment a 50% taxpayer would have an additional 30% tax to pay.

If, however, the encashment could be deferred until the investor has retired and is perhaps paying tax at the lower 20% rate, then there would potentially be no further tax to pay.

Alternatively, the investment bond could be transferred by assignment to a spouse/civil partner or adult child who does not pay tax at 40% or 50%, although expert advice would be required in such a case to ensure that the tax consequences are fully understood.

Finally, it makes sense to consider transferring income-producing assets from a spouse in the new higher tax bracket to the one in the lower tax bracket if possible. Such assets can include bank or building society deposits, shares, collectives, rental property and investment bonds.

If nothing else the Chancellor’s 50% “tax bombshell” has given investors a great excuse to review their investment portfolios to ensure that they are invested in the most tax-efficient manner available, whilst the new increased ISA limits have widened the potential tax planning scope of such investments.

■ The author can be contacted at:

Allchurch Bailey Wealth, 93 High Street, Evesham, Worcs. WR11 4DU; telephone 01386 442597, e-mail; website

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