By Sophie Baker
The increase in capital gains tax (CGT) will force higher rate taxpayers towards ISAs as a tax-friendly alternative to pensions, and could see investment bonds come back to the fore.
Alico Wealth Management said the news that CGT will rise to 28 per cent for higher rate taxpayers, paying income tax at 40 per cent and 50 per cent, but remains at 18 per cent at the basic rate could push those caught in the higher rate bracket towards other options.
Jon Sadler, head of retirement at Alico Wealth Management, said: “The rise in CGT which was today announced in the Emergency Budget will see many higher rate tax payers turning to ISAs for a tax-friendly alternative to pensions. However, MIPs (Maximum Investment Plans) are another viable – if currently underused – option available to those who will be affected by these tax changes, not least because they can be used to defer or reduce higher rates of income tax.
“MIPs provide a tax efficient saving structure for higher-rate tax payers, enabling them to regularly save money which will only require them to pay basic rate income tax on the investment gain.
“With the Government continuing to clamp down on tax structures – particularly on those which are based offshore – MIPs offer a tried and tested alternative for those who continue to be affected by changing tax rules."
Standard Life said the changes will also be to the benefit of the bond market, which suffered in 2008 after the reduction in CGT rate. However, the partial reversal of the 2008 changes should, the group said, revive investment bonds, which Standard Life said are useful for ‘sheltering’ investment income.
John Lawson, head of pensions policy at Standard Life, said: “Investment bonds are incredibly useful as a tax planning tool. For those people paying higher rates of tax today’s announcement on Capital Gains Tax are likely to make investment bonds a very viable alternative to other types of investment. Investment bonds are now available with transparent factory-gate charges, and can hold a wide range of investment funds and cash deposits.”