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Are changes to the capital gains tax system looming?

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Investors, entrepreneurs and buy-to-let landlords face substantially higher rates of capital gains tax if the government accepts new recommendations for reform of the system. The reforms, proposed by The Institute for Public Policy Research (IPPR), would result in a hike in the rates of capital gains tax, all to make the UK’s tax system fairer while increasing revenue to the Treasury.

The think tank made its proposals in a report called Just Tax. It estimated the government could raise an additional £90bn in capital gains tax over the next five years by making one simple change; taxing capital gains at the same rate as income.

Under the current tax system, capital gains are taxed based on different thresholds to income tax. Higher earners typically pay lower rates of capital gains tax than they do for income tax.

Another proposed change from the IPPR, which could raise £15bn extra in five years, would be to remove the capital gains tax exemption on death. As things stand, a deceased’s estate is not subject to capital gains tax, instead of suffering only inheritance tax.

The driving force behind the proposed reforms is the recognition that different sources of money currently result in very different tax treatments. This anomaly in the tax system means higher earners can pay lower tax, on average, than lower earners who solely derive their income from employment.

According to the IPPR, this system is “fundamentally unfair”, distorting economic behaviour and opening the doors to tax avoidance opportunities.

Capital gains tax is charged on the profit made when most personal possessions worth more than £6,000 are sold. Excluded from this tax are vehicles, investments held within the tax-wrapper of an Individual Savings Account (ISA), and principle private residences (homes).

The tax is charged at 10% or 20%, depending on the income tax band of the taxpayer. Capital gains tax on property sales is currently charged at 18% for basic rate taxpayers and 28% for higher and additional rate taxpayers.

According to the Just Tax report:

“Taken together, we believe these proposals amount to a transformation of the taxation of income which would move us towards a more economically just system and warrant serious consideration for any government interested in raising revenue in a progressive manner.”

The proposals to reform capital gains tax have come along at an interesting time, with a great deal of speculation about a snap general election. Despite his best efforts, Prime Minister Boris Johnson has failed to force a general election ahead of the prorogation of parliament until mid-October.

Should a general election occur around the time of the UK’s scheduled departure from the European Union at the end of October, taxation is likely to form a key battleground for the parties, as well as Brexit. But these proposals from the IPPR serve as a stark reminder that tax policy can and does change, sometimes with little notice.

Investors are well advised to consider the consequences of any capital gains tax hike and planVVV by utilising available allowances today to move taxable investments into tax-free wrappers.

Emma-Jane Kerr joins the Wells Gibson team

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We are delighted to announce that Emma-Jane Kerr has joined the Wells Gibson team as an Executive Assistant.

Emma-Jane has over 20 years of extensive experience in both the public and private sector, including Virgin Media, the Ministry of Defence and Scotland’s environmental regulator, SEPA.

As a support specialist, her strengths include high level administration, diary management, report writing and project co-ordination.  She also specialises in analysing and assessing critical performance data for key decision makers in business.

Emma-Jane also holds industry qualifications in project management, leadership and management.

Why Gold is a Bad Investment

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I loved Spandau Ballet’s 1983 hit song, Gold, however Gold is a bit like the Marmite of the investing world; you either love it or you hate it.

For a minority of investors, often referred to as ‘gold bugs’, a bad word should never be spoken about this precious metal.  Their obsessive belief in gold as the ultimate investment is unshakeable. However, for most investors, investing in gold is a pretty bad idea and here are three reasons why.

Firstly, and arguably most importantly, gold isn’t really an investment.  It’s a commodity.  An investment is something that has an expected return and generates wealth so because gold doesn’t produce any income, it can’t be considered an investment in the same way as company shares, fixed income securities (bonds) or property.

As a commodity with no ability to generate wealth, gold fluctuates in value as a result of speculation over its future value.  It has limited supply, and opinions about the fluctuating future demand for gold is what prompts these changes in value.

Speculating is very different to investing.  It’s certainly a lot riskier.  

The second reason why gold is a bad investment is the difficulty you are likely to face trying to access this asset class in your portfolio.  When it comes to investing in gold, you really face two choices; buying physical gold or using an investment product designed to replicate changes in its value.

If you opt for owning physical gold, such as bars or coins, then you need to consider the (high) cost of buying and selling, along with the cost of storage and insurance.  It’s probably not a good idea to keep a load of gold bars in your safe at home, which means plumping for expensive storage facilities instead.

Investing via a digital product such as an Exchange Traded Commodity (ETC) comes with a different set of risks and considerations.  If the ETC in question uses derivatives to track the performance of an index, you introduce counterparty risk to the equation, which could see you losing money if one of the lenders involved in that index tracking process fails.

If your primary motivation for buying gold is to have a store of wealth in case of a disaster scenario, then owning it electronically (or having it stored in a remote vault) is going to do you little good should the world around you collapse.  In that scenario, the only gold with any real value is the gold in your pocket.

The third reason gold is a bad investment is because of a concept known as a crowded trade.  Whilst there is no precise definition of the crowded trade, it generally describes a situation where a large number of investors share a similar sentiment and there is a heavy presence of short-term investors. These short-term investors are ‘speculators’ rather than ‘investors’.  Those that invest in gold tend to be passionate about the investment, often lacking fundamental reasons for the allocation.  A crowded trade is therefore likely to amplify volatility and risk.

These three reasons for gold as a bad investment should be enough to deter most investors.

Another important factor to consider is inadvertent overexposure to gold as a result of existing indirect allocation via mining shares in UK equity portfolios.  Basic resources make up a little more than 8% of the FTSE 100 index of leading UK company shares, so it’s likely that within your investment portfolio you already enjoy some indirect exposure to gold.

There’s nothing inherently wrong with adding some gold to your investment portfolio.  Assuming you understand how this commodity behaves, and you don’t get carried away with too much allocation to gold, then it can help to dampen down volatility during times of turbulent equity markets.

However please try not to become a gold bug, convinced as they are that gold is the be all and end all of investing options.  

As Spandau Ballet sing in their hit song, True, ‘I know this much is true’!

For more information please don’t hesitate to contact Jonathan Gibson.