Protecting Investments From Capital Gains Tax

The IRS capital gains tax is a way for the government to profit from the wealth of Americans to increase their tax collections.

Investment bonds allow you to assign parts of them to others who have a lower tax rate than you. For example if a segment of your investment bond was assigned to your child who was going to university and they encashed it, the gain would be added to their income for the year. If their income tax allowance was, say £6475 (the government are talking about increasing the income tax allowance to over £10,000) and the bond was encashed with a £13000 value but the gain was less than £6475, there would be no tax to pay. This is an excellent way to achieve tax free growth and tax free distribution, particularly if the government are signposting that income tax allowances will increase substantially. Another option is to become non resident for a year and then encash and you will not be subjected to UK income tax.

In the immediate aftermath of the Pre-Budget Report, early commentators were swift to remark on what good news this was for property investors. The new rate of 18%, they argued, was an improvement on the effective long-term rate for sales of non-business assets by higher rate taxpayers holding property for ten years or more: 24%.

All of that of course is a sideline to the fact that UK farm land has increased in value every year for ten years at an average ate of about 10% according to the Royal Institute of Chartered Surveyors, and is yet still only half the price of farm land in Ireland, Holland and Denmark, leaving a huge margin for growth, not to mention the income stream created by renting the land to a farmer (we are achieving 7% per annum in 2010).

If you're a collector of fine art, jewelry, planes, boats, race horses, or anything of value, you owe it to yourself to look into the benefits of the Private Annuity Trust. There is no minimum or maximum value for property that can be transferred into a Private Annuity Trust. The Trust structure, as a planning tool, is a resource that can help you pass wealth to generations of your family, without worry about losing large chunks to taxes at each transfer. For many investors, it may be a key to safe, smart, investing.

If, however, it was not a pre-CGT asset for the person who dies, you may need details of all relevant costs that they incurred as well as those incurred by the trustee, who should be able to give you the appropriate information related to this. Importantly, if you inherited after 21 August 1996 a house that was the main residence of the person that you inherited it from, you can claim a full CGT exemption from the asset as long as you have an appropriate valuation.

Another exception to the payment of the CGT is that, if you are selling your privately owned car or selling your primary home, you are not required to pay the Capital Gains Tax. The tax also does not apply to the payments received from premium bonds, personal injury compensation, and lottery winnings.

I learnt many years ago that you should regard your money as a machine that generates cash. At times the machine may grow bigger or smaller, but as long as it continues to generate the cash, that is OK. The cash may be income, interest, dividends or capital gains - it doesn't matter. It's still money in your bank account. And in the short-to-medium term, as long as you don't need to touch your capital, it doesn't matter if it shrinks. (Actually you gain a little bit - investment fund managers take a fee each year that is usually calculated as a percentage (1% - 1.5%) of the fund value, so whenever the fund shrinks, their fee falls).

Sorry LLCs and S-corps, you can only qualify for the tax break if you invest in a C-corporation with assets of less than $50 million. Other restrictions prevent newly incorporated businesses in fields like farming, accounting and law, restaurants and hotels, or banking and finance from benefiting. The tax break is geared towards corporations in fields that are believed to have high-job growth potential such as manufacturing and technology.