Tax changes in April: 4 valuable suggestions to help you manage your investments
In his September 2022 autumn statement, chancellor Jeremy Hunt announced two important tax changes that could have an effect on your investment income strategy in the future.
The changes will affect Capital Gains Tax (CGT) and the Dividend Allowance when they come into force from April 2023.
The CGT annual exempt amount is being reduced
The amount of profit you can take from your investments before you start being liable for CGT is going down by more than half in April 2023.
Known as your “annual exempt amount”, it is being reduced from £12,300 to £6,000 in the new tax year and will then be reduced further to £3,000 in April 2024.
The table below sets out the 2022/23 and 2023/24 exempt amounts and the various CGT rates that are applicable.
CGT rates over the next 2 years
Changes to the Dividend Allowance also come into force from April
The amount of dividends you can take tax-free, known as your “Dividend Allowance”, is falling over the next two tax years from the current level of £2,000 to £1,000 in 2023/24, and then to £500 in 2024/25.
Dividend Allowance over the next 2 years
This change is likely to affect you if you have a share or investment portfolio that is not held in a tax efficient wrapper, or if you draw part of your earnings through dividends from your business.
For example, the current allowance of £2,000 will cover dividend returns of up to 5% on shares worth up to £40,000.
These reductions in the allowance will result in you potentially being liable to more tax in these circumstances.
Given these impending changes, learn four ideas to help you manage your investments and minimise the tax you’re liable for.
1. Manage your investments as a couple
A key point to bear in mind when you’re thinking about your investment income is that the CGT annual exempt amount allowance applies to all individuals, regardless of how much you earn.
This means that sharing assets between yourself and your spouse or civil partner enables you to utilise two allowances and can help you reduce your tax bill.
In the 2022/23 tax year you have a combined exempt amount of £24,600.
Furthermore, because the rate at which you pay CGT is dependent on your Income Tax status, it makes sound sense to think strategically about the way you distribute investments between you.
If your spouse pays a lower rate of Income Tax than you, they may also benefit from a lower rate of CGT.
Likewise, with the reduced Dividend Allowance, you should consider transferring shares between you to maximise your allowance, as well as ensuring you’re making the most of either of you being a basic-rate taxpayer.
2. Start thinking ahead with regard to asset disposal
The imminent deadline of the end of the 2022/23 tax year means you need to start planning as a matter of some urgency if you feel the changes to CGT and the Dividend Allowance will affect you.
For example, you may want to think about rescheduling the disposal of your assets, if you’re able to, in order to take full advantage of your CGT exempt allowance of £12,300 in the current tax year.
You should also be aware that these changes may not be the end of the story. In November 2020, the then chancellor Rishi Sunak commissioned a report from the Office for Tax Simplification (OTS), who recommended that CGT be aligned to Income Tax.
Clearly such changes will mean that the tax liability of selling a business property or a residential property that is not your primary address will become considerably higher.
So, it could make financial sense to review any large asset disposals you’ve been considering to see if you could reschedule them to take advantage of your exempt allowance while you can, or look for other tax-efficient options.
3. Aim to maximise your ISA allowances each year
As assets held in an ISA are free of CGT when you withdraw them, the changes in April make them an attractive investment option.
There’s also a joint planning angle, as each individual, regardless of their income, can contribute up to £20,000 to an ISA in the 2022/23 tax year.
You and your spouse or partner can contribute £40,000 tax-efficiently with no CGT or Income Tax liable when you want to draw profits from your ISA fund.
This means that, between you, you’ll be able to invest £80,000 – £40,000 now and £40,000 at the start of the new tax year in April – in tax-efficient accounts free of CGT.
4. Consider bonds as an investment option
The changes to CGT and your Dividend Allowance mean that you might want to consider using bonds as part of your investment strategy.
One key advantage is that you will not be liable for CGT on any gains you make through your bond. Additionally, while Income Tax may be payable on any withdrawals, a proportion of this can be deferred.
This means that you can take 5% of the original bond investment each year, free of any immediate tax charge.
It also means that you can create an advantageous tax scenario for yourself by being able to defer paying Income Tax until a time when you’re in a lower tax bracket, such as after you’ve retired.
Get in touch
If you think you might be affected by the changes to CGT and Dividend Tax, please get in touch.
You can email me at graeme@macfp.co.uk or call me on 01349 832849.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.