The recent Autumn Statement (Budget) saw the Chancellor announce inevitable tax rises, two of which – capital gains tax (CGT) and dividends – have investors firmly in the cross hairs. Can you do anything to soften the blow?
These changes impact investments held outside of tax wrappers like ISAs and pensions. For convenience, we’ll refer to them as being held in a ‘dealing account’ but it could also be that you hold funds or shares directly with companies rather than via a broker or platform account.
Currently you can realise gains of up to £12,300 a year without paying tax on these profits. This allowance will fall to £6,000 from April 2023 then £3,000 from April 2024. Thankfully, tax on gains exceeding the allowance remain at historically low levels of 10% within the basic rate tax band and 20% within the higher/top rate bands (additional 8% on residential property gains).
This is a big deal for many, as regularly using CGT allowances is a neat way to effectively enjoy tax-free growth. The shrinking allowance will likely push even modest-sized portfolios into CGT territory. It’s an optional tax in so far as it only applies when you sell investments and ‘realise’ a gain, but that’s little consolation given most of us plan to access investments at some point. And you could find yourself with an unwelcome tax bill when switching investments in your portfolio (e.g., swapping funds after a manager change).
The announcement that annual dividend allowances will also fall is a double whammy. Currently there is no income tax on the first £2,000 of dividends received each tax year (those falling within your income tax personal allowance also avoid tax). This will fall to £1,000 from April 2023 then £500 from April 2024. Again, this will likely hit even modest-sized portfolios that currently enjoy no tax on dividends (dividends falling within the basic rate tax band are taxed at 8.75%, rising to 33.75% within the higher rate band and 39.35% within the additional rate band).
Can you reduce the impact?
Potentially, the extent depending on your situation. Using your £12,300 CGT allowance this tax year is likely a no-brainer, as is ensuring your spouse/civil partner does likewise (if applicable). Spouses and civil partners can move assets between each other without triggering gains, so if you hold investments individually (rather than jointly) then consider re-jigging things if appropriate to maximise the use of each allowance.
Fully funding your ISA allowances this year (if available) using monies from selling dealing account investments can make sense, as might pension contributions (albeit the latter may be a trickier decision as more factors to bear in mind).
If you’ll be caught by the reduced dividend allowance, consider holding the higher dividend paying investments within your portfolio inside ISAs or pensions, albeit this could leave potentially higher growth funds in your dealing account (exacerbating any CGT issue), so it’s a balancing act.
If keeping your portfolio sensibly balanced and/or switching funds in future might be an issue with lower CGT allowances, then using a fund holding other funds could be a solution (since fund changes within the ‘overall’ fund don’t trigger CGT). However, there are potential downsides: this often adds an extra layer of fund charges (sometimes avoided when using index-tracking versions) and if you decide to switch/sell the ‘overall’ fund that will still trigger a gain re: CGT.
Using other tax wrappers (assuming you’ve already ISA/pension allowances as appropriate) is another possible solution. For mainstream investing this usually means insurance company investment bonds (available onshore & offshore), whilst those with a larger appetite for risk might contemplate specialist vehicle such as venture capital trusts and enterprise investment schemes. In short, the latter are likely too risky for most and whilst investment bonds (especially offshore) can offer potential advantages around tax planning, costs and complexity are usually greater versus the humble dealing account.
If you’re already a client of ours, rest assured we’ll thoroughly run through the options with you wherever relevant to ensure you make good decisions in light of these tax changes.
And if you’re not a client and concerned these changes might impact you, please get in touch for a friendly, informal chat covering how we might help.