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Birmingham Post
Birmingham Post
Business
Peter McGahan, chief executive of Worldwide Financial Planning & Andrew Arthur

Watch for the April 5 investment tax change

It's coming up to that time of the year again for the last-minute ISA rush. This year takes on a slightly extra bit of urgency, however.

Given that you are allowed to invest up to £20,000 per person per year, this tax break is one you just cannot afford to miss, particularly because of the following changes.

Capital gains allowances will be reduced from April 5, 2023, and further again from 2024. Currently if you make a gain of £12,300 or less there is no tax to pay. This is per person.

From April 2023 this will reduce down to £6,000, then again further to £3,000 in 2024. Trustees also see a reduction in their tax allowances. Over 500,000 people will be hit by this, but there are some easy moves to make now.

Each year, you have this capital gains allowance but it is often not used, so you may have investment assets that have gains which we could take advantage of if you have unit trusts, Oeics, or investment trusts for instance.

You sell the asset and then reinvest, creating the gain, and offsetting that against the above allowance. As it’s reducing this year, the need to offset now is key.

A tax difficulty occurs where we try and sell those assets (to create the gain against the allowance) as it often involves selling assets you don’t want to (they are the reason you have the gain!).

A tax rule doesn’t allow you to sell them and buy them back immediately. It’s called the 30-day bed and breakfast rule, so investors have to wait 30 days to buy back the investments they have sold. In between times they may have soared in value and you are now buying the asset at a much higher price.

The reverse is also true as you could sell, wait 30 days and the market collapses, so you buy the assets at a cheaper price – happy days all round.

Options to get around any problems, save the tax and avoid the above complications are many:

You could sell your assets and your spouse could buy those same assets straight away and vice versa. Another alternative is for you to buy similar assets to those you are selling ie in the same asset class with same risk and potential rewards. This isn’t such a sexy option if you are holding assets you definitely want to keep, because they have done well.

You could of course sell the taxable asset, use the allowance against the gain and then transfer that money into your pension, whilst buying the same assets within the pension. The contribution would receive an immediate tax uplift from the tax man and the assets would now grow free of tax. For example, a gain of £8,000 paid into a pension is topped up immediately to £10,000 for a basic rate tax payer.

Another option is to use the favourable ‘bed and Isa’ route. You sell the asset with the gain and buy the exact same assets in an ISA.

Those assets are now not subject to tax and grow free of tax and avoid any further tax changes to unit trusts, Oeics and investment trusts. In fact, this can be done each year to move all taxable capital into non-taxable investments like the pension and ISA.

To save time, advice and fees, you could take this advice now and do two Bed and ISAs, with one completing just before April 5 th and one just after.

As each of the tax years pass, you will see that the capital gains allowance above is reducing to very little, which really eats into the flexibilities above, so time is of the essence.

Naturally, if you haven’t already invested your maximum £20,000 in this tax year into your ISA, take advantage of it before April 5. Next week I’ll cover some options on this and what to look out for.

  • If you have a query on ISAs, call Worldwide Financial Planning and ask for a complimentary 30-minute exploratory conversation. Please ring 01872 222422 or email info@wwfp.net
  • Peter McGahan is the Chief Executive Officer of Independent Financial Adviser Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.
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