We take a look at how ISAs can help tax planning with a focus on mitigating Capital Gains Tax in particular.
Justin Urquhart Stewart is one of the most recognisable and trusted market commentators on television, radio and in the press. Originally trained as a lawyer he has observed the Investment industry for 30 years whilst in corporate banking and stockbroking, and has developed a unique understanding of the market’s roles and benefits for the private investor.
A Happy New Financial Year to us all.
Well it may not be exactly a great cause for celebration, but it is still a vital date for us all to be aware of - from remembering to wrap up our tax papers for the past year, to thinking about this year’s ISA allowance of £15,240. For a couple, this means quite a significant transfer into a tax protected account. All too often I hear people rushing to get their ISA applications in at the end of the year. This sounds perverse to me. If your money was just sitting in a bank account and earning nearly nothing, you won’t be earning much more in a cash ISA, but at least you are not having to pay any tax on it. Equally, if your money is already invested, then selling your shares/units and buying them back in a tax free environment has to be better value. Of course there will be the dealing costs, such as the dealing spread and stamp duty, but these should be quite small. And if you are with a sensible investment house that doesn’t charge either dealing commission or any annual ISA charges, then it would be common sense to act on your ISA now and not wait until next March. If you are with a sensible investment house that doesn’t charge either dealing commission or any annual ISA charges, then it would be common sense to act on your ISA now and not wait until next March.
However, we should also remember some of the other annual allowances which often get forgotten about. For example, we can each give away £3,000 as a donor to whomever we wish. For those trying to reduce Inheritance Tax exposure, this can have a substantial impact over several years.
Also there have been some changes to Capital Gains Tax (CGT). The basic rate of CGT has come down from 18% to 10%, and the higher rate has fallen from 28% to 20% although the annual CGT allowance of £11,100 remains the same.
The cut, however, is not across the board, as gains made on residential property are not eligible for the newly lowered rates. Instead, the Chancellor has in effect introduced an eight percentage point surcharge to maintain the higher rates for gains on property. The Budget document said the move was intended to “ensure that CGT provides an incentive to invest in companies over property”.
Using a £25,000 gain as an example, a basic-rate taxpayer would previously have been left with £22,498 after tax, and a higher-rate or additional-rate taxpayer with £21,108. These figures factor in the £11,100 annual CGT allowance. Under the new regime, a basic-rate taxpayer would be left with £23,610 and a higher or additional-rate taxpayer with £22,220. Both represent a £1,112 tax saving.
Never be sure about Offshore. The recent Panamanian exposures must have killed any confidence that criminals and other ne’er-do-wells had in offshore secrecy. Although shutting all of these centres down will have all the frustration of nailing floor boards down (i.e. another one will pop up somewhere else), the technology and regulation amongst the banks and regulators is tightening up. This has meant that even the highly respected names like HSBC are being brought to book and fined significant sums as we saw with their unusual banking practices and clients in Mexico.
Also the additional impact of being financially ostracised is weighing heavily on smaller nations and dependencies. Although we may be tut-tutting at Panama, our own somewhat piratical history means that we have the responsibility for some of these including the British Overseas Territories, which are small remnants left of the old Empire. Such colourful names as the Cayman Islands, the British Virgin Islands and the Turks and Caicos all have a less than pure history of piracy and raiding. These political oddities, although usually self-governing, are ultimately under the control of the UK crown. It is inevitable that even here the rules will be tightening, if only to avoid further embarrassment for the UK government itself.
Then there are the three Crown Dependencies - the Isle of Man, Jersey and Guernsey (including Alderney). These are independently administered jurisdictions, and are neither part of the United Kingdom nor British Overseas Territories. They are technically self-governing possessions of the Crown, but the United Kingdom bears responsibility for them. As a result, they are not member states of the Commonwealth of Nations, nor, save for a limited extent, a part of the European Union. They have the power to pass legislation through their own respective legislative assemblies, with the assent of the Crown, from the Duke of Normandy (the Queen) through the Privy Council, or in the case of the Isle of Man, the Lieutenant-Governor. However, the Crown dependencies are not sovereign states in their own right.
We may be amazed at the financial soap operas from Panama, but don’t laugh too much as the next ones could be under our own noses.
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And finally… who needs X-boxes, Candy Crush and Grand Theft Auto? What you really need are…..colouring books. Yes, this is the new fashion fad – get out your colouring pencils.
The trend has spawned colouring parties and clubs where grown-ups get together to colour and ‘socialize’.
"You feel creative and you're like, 'Wow, I didn't know I could do that, that looks pretty good,'" Washington resident Lydia Pesant said, at a city library that hosts monthly colouring parties.
"You could have three or four coloured pencils with you, or use your kid's crayons," said Roberts, who has produced her own book of paisley designs. "They're very accessible, they're very portable. I think they're user-friendly."
Colouring books have made their way into online retailer Amazon's list of best-selling books, often occupying spots in the top 20. It is estimated that there were 12 million copies sold in the United States in 2015 and the trend shows little sign of slowing. A new generation of colouring books which take inspiration from pop culture, instead of the more traditional designs, are expected to hit stores in 2016.
I wish them well, although I am somewhat suspicious of anything that markets itself as an adult colouring book. It is not something I necessarily want to be seen with at the airport security searches.
Have a good week.
Justin Urquhart Stewart
Seven Investment Management
This article represents a personal and light-hearted view from 7IM, and is based on current financial news and events around the world. Its content should not be used for investment purposes and you should contact an independent financial adviser before making any investment or financial decision.
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