Things you need to do now! Part 2 Getting your investments ready for new-look tax year

The Autumn Statement has introduced changes to dividend and capital gains taxation from April this year, with more following in April 2024.

Taken together, the government believes these measures will raise more than £1.2bn in 2025/26, growing steadily thereafter, which means clients are going to be paying more tax on their unwrapped investments. However, there are some routes to help them deal with the impact of these changes.

Reduced Dividend Allowance

Looking closer into the details. First, the dividend allowance, which will be substantially cut over the next two tax years, reducing from £2,000 to £1,000 from April and then dropping further to £500 in tax year 2024/25.

If we consider a client who achieves a yield of 4% on their portfolio, currently anyone with a portfolio of £50,000 would see their dividend income covered by the £2,000 allowance. By April 2024, though, only portfolios of £12,500 or less would pay no tax.

Given this type of income is applied after non-savings and saving income, this could increase the number of people paying higher rates of tax. Which, in turn, leads to more people having to complete self-assessment tax returns.

Reduction of the Capital Gains Allowance

Alongside this, the government is reducing an individual’s capital gains tax exemption from the current £12,300 to £6,000 from April and then to £3,000 from tax year 2024/25.

Trusts will continue to get half the individual exemption, meaning this will fall to £1,500 from April 2024. As these exemptions fall, the amount clients can sell without suffering tax consequences will be substantially reduced.

This is bad news for the average investor holding money in unwrapped portfolios outside Isas and pensions. But many other clients will be hit, including those with taxable portfolios who undertake automated rebalancing, trustees with unwrapped portfolios within their trusts, buy-to-let investors and those who use general investment accounts to fund Isas on an annual basis.

What can investors do?

In the run up to these changes, investors should ensure they are taking advantage of all personal tax allowances and exemptions, and consider equalising assets between spouses so allowances can be used to maximum effect across the household.

As we approach the end of the tax year, it is worth considering crystallising gains to use the current higher exemption and reinvest these into tax efficient wrappers such as Isas, pensions and investment bonds.

Investors should also investigate whether it is possible to offset some capital gains by reporting any losses made on a chargeable asset to HM Revenue & Customs.

Investment Bonds now even more attractive

Moving forward, non-income producing assets such as investment bonds could be an appropriate home for reinvestment. There are several key advantages given the new rules. The most obvious is the ability to withdraw 5% of the amount invested annually, tax deferred, which isn’t affected by these changes.

The 5% allowance is cumulative and can roll over for use in future policy years. In addition, switching between funds does not give rise to any personal tax liability. Segmentation adds flexibility for assigning part or all the bond to another individual and gives control over who is liable to pay tax and when.

Adding younger lives assured or considering an offshore capital redemption bond can extend the policy term, preventing a chargeable event on the death of older policy owners. Meanwhile, time apportionment relief is available to investors who suffer a chargeable event and were non-UK resident for part of the policy term.

If a chargeable event occurs on an onshore bond, no further tax is due if clients remain a non-taxpayer or basic-rate taxpayer. While for offshore, no or low tax is paid on assets so the investor benefits from gross roll-up of any investment growth.

Any chargeable gains are treated as savings income and, depending on a client’s personal tax situation, they could benefit from the personal savings allowance and starting rate band, which can mean up to £6,000 at zero tax.

To make you are maximising all your allowances and taking advantage of all options before the tax changes take effect, contact me at Calendly - Marc Burman

This information is not intended as investment advice and should not be relied upon as such. Professional investment advice specific to your individual circumstances should be sought from an authorized financial advisor, regulated by the Financial Conduct Authority (FCA).