Which investments to use CGT allowance?
|Financial Advice | General
Asked by lionheart, submitted
07 January 2013.
Which forms of investment would you suggest to primarily generate capital gains (to use annual CGT allowance)
when annual ISA and pension allowances have been fully utilised.
Answered by Justin on 24 January 2013
The key is to select investments that (hopefully) increase in price and don't pay an income.
Income, such as dividends on shares, can obviously be re-invested to boost growth, but as the income is taxable it won't be as tax efficient as pure gains which can be offset against your annual capital gains tax (CGT)allowance.
In practice the most common route is to hold shares in higher growth companies, which seldom pay dividends - either directly or via an investment fund. Of course, this has its own set of risks and you need to be comfortable such investments fit into your overall plans. No point saving tax if the investments are wrong you for.
There are other options:
Commodities such as gold don't pay an income, so all returns are treated as gains. Risk varies widely, but volatility is generally quite high. Gold as had a good run in recent years, largely thanks to nervous investors using it a safe haven while global economies and stock markets struggle. Increased demand from emerging markets has also helped, but we could see a sharp drop in price if/when global confidence in stock markets is restored (it could take some time). More details in my article here.
Some protected stock market plans are structured to ensure all returns are subject to capital gains tax, not income. Again, the investment may not be your cup of tea, but can be useful if you want to take a more cautious approach. Such plans usually protect some or all of your initial investment then link returns to one or more stock market indices (see our protected investments page for more details). You can view a list at www.structuredproductreview.com - it's run by a discount broker, so arguably not truly impartial, but a useful resource nevertheless.
There are also a few protected unit trusts, which also class returns as capital - e.g. Close Escalator 100.
This category covers art, wine and classic cars etc. I don't know much about any of these, other than always be wary if the seller is more knowledgeable than you. Prices have generally been on the increase in recent years for much the same reason as gold, nervous investors like 'real' assets. But there are obviously risks and little regulation, so plenty of scope to be taken advantage of. The other issue re: CGT is that you can't just sell part of a painting or car to use your annual allowance, it's all or nothing which could still leave you with a tax bill.
Other tax shelters
There are other tax shelters, aside from ISAs and pensions, namely Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS). Both are designed to encourage investments in small companies, so the risks can be high, especially as it can sometimes be hard to find a buyer when you want to exit. More details on our specialist investments page.
I know my answer isn't exhaustive, but hopefully it gives you some helpful pointers.