Emergency Budget could see rush to crystallise capital gains

With the new Conservative/Liberal Democrat government expected to hold an emergency Budget within 50 days, leading investment group F&C warns that private investors will need to consider taking swift action in order to mitigate potential tax hikes.

These include an anticipated harmonisation of income tax and capital gains tax (CGT) rates, which could see the current flat 18% rate of CGT be replaced by levels of up to 50% depending on an individual's income tax band, and the likely demise of the Child Trust Fund.

Jason Hollands, Director, Head of Corporate Affairs at F&C Investments, said: "Closing the differential rates between CGT and income tax should prompt a flurry of investors, particularly those on higher income tax rates, to urgently consider crystallising gains made on long-standing holdings ahead of the Budget. One strategy open to them will be to ‘bed and ISA' these holdings, i.e. to sell them and repurchase within an Individual Savings Account so that they utilise current annual CGT exemptions and incur any additional tax liability at the 18% rate while future returns will be ring-fenced from the taxman altogether. We expect IFAs and tax advisers will have a very busy month ahead."

At present each individual has a capital gains tax allowance of £10,100 a year. Gains in excess of this allowance can also be offset by any realised losses on other investments or assets. The ISA allowance is £10,200, meaning investors who have not yet used their 2010/11 allowance have the opportunity to crystallise gains from the strong markets of the past year and reinvest them for future growth without any liability to tax.

F&C also points out that with Liberal Democrat policy favouring the complete abolition of the Child Trust Fund, and the Conservative manifesto calling for a scaling back of the scheme to limit it to those on low incomes, the future of the allowance is now "severely in doubt".

F&C is a leading provider of Child Trust Funds, with its shares account offering access to a range of established investment trusts, from the 142-year-old globally diversified Foreign & Colonial Investment Trust to more specialist options such as F&C Private Equity Trust. F&C also offers a Children's Investment Plan giving access to the same range of trusts, with no maximum investment but without the CTF tax breaks.

Hollands said: "The likelihood is that in due course no new CTFs will be issued, which is disappointing, but we do not expect top-ups of existing plans to be prevented. Parents and guardians whose children are currently eligible for the CTF should take advantage of this allowance while they can by topping up if they are in a position to do so."

With the Conservatives appearing to have embraced Liberal Democrat ideals of ‘fairness' in the tax system, Hollands cautions that investors should be wary of other potential changes that could pop up in an emergency "austerity" budget. In particular he notes that the outgoing Labour administration had already scaled back tax relief on pensions for top earners, though this was delayed until the start of the 2011/12 tax year. "There is a real possibility the new Government may bring this change forward, so those on high incomes planning to maximise their pension contributions in advance of the change may decide to err on the side of caution and do so before the Budget.

"It is widely acknowledged that the UK is facing the toughest economic conditions for a generation," added Hollands. "In such times a degree of enforced austerity is inevitable, and some of the generous tax breaks investors have enjoyed in recent years may be early casualties. While tax treatment should never be the driving factor behind a decision to invest, there could be an element of "use it or lose it" for some tax-favoured schemes in the coming months."