How Capital Gains Tax (CGT) reforms have changed the face of Onshore Investment.

The Finance Act 2008 removed “Taper Relief” and its predecessor “Indexation” from the Capital Gains vocabulary. It also removed the prospect of Higher Rate Tax and set as standard a rate of 18% tax for gains in excess of the Capital Gains Allowance (currently £10,100 per annum).

There was much lobbying in Parliament by the insurance companies because, at a stroke, the government had virtually confined Onshore investment bonds to history. This, because such bonds are automatically subject to Basic Rate Tax on any gains within the bond, whereas Unit Trusts and OEICs only pay 18% tax on gains in excess of the annual allowance of £10,100, and then only if the encashment were to give rise to such a gain.

For Example: £200,000 invested in a Unit Trust grows in one year by 10% and is worth £220,000. £110,000 is suddenly needed and withdrawn from the Unit Trust. A gain of £10, 000 only would be registered and, because this is within the annual allowance of £10,100, the whole withdrawal would be free of tax

Such changes in legislation are, of course, not exempt from re-adjustment in the future, particularly by a new government coming to power, but I feel fundamental changes would be unlikely. A new government might, particularly given our current level of national debt, be more inclined to increase all levels of tax together, thereby maintaining the imbalance between bonds and unit trusts.

So we are left with a regime that disadvantages Onshore bonds in favour of Unit Trusts and OEICs.

Our Capital Gains Allowance is probably the most underused of our personal tax allowances and I believe it is an area worthy of “in depth” discussion with your financial adviser. Furthermore, any client who has had their money in an Onshore bond for five years or more should look upon such a discussion with some urgency.

Richard Perkins Dip PFS