TENS of thousands of long-term investors in shares and property could be worse off under the government's capital gains tax changes from April in what has been branded Labour's latest "stealth" tax hike.
Alistair Darling, the chancellor, has billed his CGT reforms as largely positive for ordinary savers. Until now it had been thought most investors in company shares and buy-to-lets would benefit from the lowering of the rate to 18%.
But it emerged last week that savers could be as much as £3,000 worse off from April due to the removal of "indexation relief" - unless they take action now.
The good news is that accountants have uncovered a relatively easy way to prevent your CGT bill going up. It is a useful method for anyone who has owned property, company shares or investment funds for more than 10 years, even if they will not be worse off under the new regime.
The CGT rise is not the only trap looming in April. Thousands of families who have set up trusts for children or grandchildren face an extra 6% tax unless they review their wills.
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And the government is also gearing up for a raid on tax-free Peps, the predecessor to Isas, even though stock markets have had their rockiest start to the year since the 1930s.
The new stealth taxes emerged as the Institute of Fiscal Studies said that Darling would have to raise taxes by £8 billion to avoid breaking the government's self-imposed "golden rule" over the coming five years. That's equivalent to an extra 2p in the pound on income tax.
John Akerman, an investor from Chiches-ter, West Sussex, is one of the losers. He said: "I have about £30,000 sitting in a long-term investment in IBM, where I used to work. These measures make life much more complicated."
Here we highlight the tax traps and how to get round them.
CGT losers
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Darling announced last October he would sweep away the complex CGT system and replace it with one flat rate of 18%. Most higher-rate taxpayers with nonbusiness assets, which include second homes, buy-to-lets and shares listed on the main market, were assumed to be winners - they would see CGT cut from a minimum of 24% to 18%.
A trawl through the small print, however, shows tens of thousands of long-term investors will be substantially worse off because indexation allowance is being abolished.
Investors with assets purchased before 1998 benefit from indexation allowance, which was brought in to take account of high inflation.
Someone who bought an investment in the summer of 1982 could knock an extra 105% off the gain they have made. Suppose he or she bought the assets for £50,000 in 1982 and sold them today for £200,000. The first £102,000 of profits would be tax free, reducing the taxable gain from £150,000 to £98,000.
Because of taper relief, a higher-rate taxpayer would pay 24% on the £98,000 gain, or £23,520 if he or she sold before April 5, ignoring annual allowances.
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But the tax bill would jump to £27,000 if the sale took place after that date as indexation and taper relief are removed and replaced by a flat 18% tax rate on the full £150,000 gain.
Jason Butler at Bloomsbury Financial Planning said: "Investors who have most to lose are those with relatively small gains, including investors in Japan, stock-market dogs such as Rentokil and owners of farmland."
You don't have to lose out, though. You can pass your assets tax free to your spouse to lock in the benefit of indexation.
In the above example, as long as the transfer took place before April 5, the value of the shares when the spouse received them would be £50,000 plus the indexation allowance - in other words, they would be assumed to have acquired the assets for £102,000.
If the couple then sold their shares for £200,000 in May, their gain would be £98,000. He or she would pay tax on this profit at the new 18% rate - a bill of £17,640 against £27,000 if the couple did nothing.
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Mike Warburton at Grant Thornton, an accountant, said: "All married couples who benefit from indexation allowance should consider it, as in many cases they will be substantially better off."
You can check what the tax changes mean for you using Hargreaves Lansdown's CGT calculator at www.H-L.co.uk/cgt.
Trust penalty
Tens of thousands of people are being urged to review their wills or face being stung with inheritance-tax (IHT) charges on their assets. The clampdown, first announced in 2006, hits two types of trust that are often written into wills to provide for family members - accumulation and maintenance and interest in possession.
A&M trusts were particularly popular with grandparents who wanted to pass assets on to grandchildren free from IHT, but wanted to retain control of how those assets were used.
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Before the new rules, gifts into the trusts were usually exempt from IHT but from April they could be subject to 20% tax above the IHT threshold of £300,000, as well as ongoing 6% charges every decade.
The charges applied immediately to trusts set up after March 2006, but existing trusts were given until April 5 this year to make changes.
Families can avoid the new charges by making sure that the children become absolutely entitled to the assets at 18.
PEP tax grab
Investors who think they are denying the Revenue by investing in Peps and Isas could be in for a nasty shock when Peps are converted into Isas this April.
The move is designed to make it easier to manage investments, but there is a sting in the tail. If you hold uninvested cash in a Pep and earn interest on it, you do not have to pay tax on the interest. However, if you hold cash in an Isa, 20% savings tax is automatically deducted.
TAKE ACTION NOW
- If you've held investments for more than 10 years, transfer the assets to your spouse to lock in the benefits of the indexation allowance
- Investors who have held investments for less than 10 years should check whether they will be better off when a flat 18% tax rate on gains is introduced. Try www.H-L.co.uk/cgt
- Families who have set up trusts to pass on assets should seek advice from a solicitor - or they could be stung by a new IHT charge