09.a - Tax
Transcript of 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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Golden Rules of InvestInG:LeSSON 9
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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Golden Rules of InvestInG:LeSSON 9
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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Golden Rules of InvestInG:LeSSON 9
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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Golden Rules of InvestInG:LeSSON 9
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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Golden Rules of InvestInG:LeSSON 9
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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Golden Rules of InvestInG:LeSSON 9
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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Golden Rules of InvestInG:LeSSON 9
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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Golden Rules of InvestInG:LeSSON 9
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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Golden Rules of InvestInG:LeSSON 9
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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Golden Rules of InvestInG:LeSSON 9
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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Golden Rules of InvestInG:LeSSON 9
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
-
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16/16