Taxation

Capital Gains Tax (CGT)

The return you get from many investments divides neatly into two parts.

First, there are the income payments which the investment produces and, secondly, its capital growth. With an equity investment, for example, the shares you own will produce both income from the dividends and - with luck - capital growth from a rising share price. The Government taxes both elements of this gain, the first through income tax, the second through CGT.

CGT is charged at up to 40% if your taxable gains total over £8,500 (2005/2006). The longer you hold the assets, the less portion of tax you should pay due to what is known as "taper relief". The taper reduces the amount of the chargeable gain according to how long the asset has been held.

There are financial products available that can help you minimise or defer your capital gains tax liability. Investing through Individual Savings Accounts (ISAs) is an ideal way to minimise the tax as no capital gains tax is paid on any profits made. There are other products available which offer capital gains tax breaks and an IFA can discuss the options with you.

Inheritance Tax Planning
 
On your death your estate might be liable to pay Inheritance Tax. This tax is payable if the value of your estate is over a certain limit, which changes from time to time. If you own your house your assets could easily exceed the amount above which Inheritance Tax is due (although any amounts owed, such as a mortgage, are excluded from the calculation). You may want to save your family from having to find money for Inheritance Tax.
 
Life insurance can be arranged in such a way that on your death the sum insured does not form part of your estate and will not then be liable to tax.  The policy proceeds can then be used to pay any tax for which the estate is liable or to meet day to-day expenses while your dependants wait for money from your estate to become available.  Gifts given in the last seven years of your life can also create a liability to pay Inheritance Tax. Life insurance can be arranged to cover this liability.
 
Income Tax
 
Provided your policy is a “qualifying policy” the benefits paid on death or maturity are not subject to income tax. To qualify, a policy has to satisfy certain statutory conditions. These include the need to pay premiums at annual or shorter intervals for at least 10 years or until your earlier death. Your sales person, adviser or insurer will tell you whether or not your policy is a qualifying one.  

Please note: All figures shown in this brochure are those applying in the 2005/2006 tax year. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.