Growth from capital gains

Growth from capital gains

For people investing for capital growth driven by capital gains (as opposed to reinvested income), the effect of the changes will depend on their circumstances. For example:

• For those investors whose gains would normally fall within the annual CGT exemption, these changes have no obvious effect (although if they also qualified for taper relief, less of the annual exemption may have been used up as taper relief is applied before the annual exemption). A collective will have been the ‘tax preferred’ investment and will remain so.

• For higher rate taxpayers who are investing over 10 years or more and will exceed their annual CGT exemption, they will now pay 18% as opposed to 24% (with basic rate taxpayers paying 18% instead of 12%). Different effective rates will have been paid with taper relief if the holding period for the realised investment was between 3 and 10 years. Again, a collective will have been and will remain the tax preferred choice.

• For higher rate taxpayers who are investing for the short-term (less than 3 years) and will have gains that exceed the annual exemption, they will now pay 18% as opposed to 40% (with the basic rate taxpayers paying 18% instead of 20%). But for such an investor, we don’t believe a mutual fund or an investment bond would be appropriate as both are aimed at those willing to invest for the medium to long-term.

The benefits of the reduction in tax will gradually reduce the longer the investor holds the investment and even more so if the annual exemption were available. The table below gives a graphical view of this.









For investors who:

- don't use their annual exemption each year (and capital gains will not exceed the available exemption) or,

- invest and hold for the long term or,

- are basic rate taxpayers

The benefits of the changes will be less pronounced.

In this context, it’s worth noting that HMRC only expect around 250,000 investors to be CGT payers this year. The point is that, as we have said above, even under the current rules, a collective investment is, on tax grounds, likely to be the recommended “home” for capital gains in a portfolio. The changes do not affect this.