The Great British Tax Grab

– and six ways to prepare against it

First the very good news

Reading this and acting accordingly will save you money in the coming year!

That’s because, in just a few months (April 2018) the tax-free dividend allowance is going to be reduced from £5,000 to £2,000. This will reduce any tax-free sums investors receive in dividends by over half.

Those hit hardest will be any small business owner, who pays themselves via a dividend, as well as investors who are dependent upon income from shares or funds; especially those who are now retired.

However, there are things you can do that might help save you from ‘the grab’.

How will the tax grab work?

From April this year basic rate taxpayers with dividends of £5,000 will have to pay an extra £225, higher rate taxpayers an extra £975 and additional rate taxpayers an extra £1,143 in extra income tax.

The numbers speak for themselves and we would advise clients to start exploring the ways they can mitigate the impact of these changes.

So here are six of the best ways to guard against the grab
• Put investments in joint names
• Make use of exempt wrappers
• Split investments or income to minimise tax
• Rebalance your investments
• Place equity investments within an investment bond
• Review your current position

Joint names

Two names are always better than one when it comes to avoiding any tax grab. By switching investments into your and your spouse’s name you may help prevent paying excess tax.
Take a retired couple with a £100,000 investment in a UK equity income collective fund (held in one name), who receive £4,000 pa income distributions. The April 2018 changes would mean that an additional tax of £150 to £762 would be due (depending upon tax status).

If the fund was switched to joint names, this could help avoid any increase in tax paid, as both spouse’s tax-allowance is now utilised.

Exempt wrappers

Equity investments held via ISAs, Pensions or VCTs are exempt from dividend taxation. Meaning that a couple investing £40,000 in a UK equity income collective investment fund in a stocks and shares ISA this tax year (at a distribution yield of 4%) will receive £1,600 pa tax-free.

That’s a saving of £120 and £610 each year. Plus they can invest into their ISA each year from then on, which further increases the tax saving.

Split investments or incomes between spouses

It doesn’t have to be a 50:50 split, as clients need only hold specific proportions of investment in order to utilise any dividend allowance and take advantage of lower marginal dividend tax rates.
A couple with a jointly held £200,000 of UK shares and collective investment funds would receive £8,000 pa income distributions.
Although they might both have their dividend allowance available from 6 April 2018, if one is a HRT and the other a BRT, then they would be wise to split their investment 25:75 in favour of the BRT. That way the dividend tax on anything over their tax allowance only gets taken at 7.5% and not 32.5%.

That’s a saving of £500 each year – which is a significant 25% tax difference of £2,000.

Get the balance right

Rebalancing your investments between those taxed as interest or dividends can be a clever move. If you currently hold a mix of investments, with some taxed as savings income and some as dividends, then you should review your position to ensure that both your personal savings and dividend allowance are being properly utilised, so that you are achieving the full £6,000 pa for each as tax-free income.

With tax on savings set higher than dividends, you may wish to consider investments in exempt wrappers. Equally with your personal savings allowance at £1,000 pa (BRT) or £500 (HRT) each, means that a corporate bond collective investment fund with a distribution yield of 4% equates to a £50,000 tax-free investment per BRT couple.

Make better use of investment bonds

Tax deferred investment bonds (onshore) may be an advantageous way of holding UK equity investments. Especially if you are an individual who has fully used your dividend and other allowances, or you are a trustee of a discretionary trust who just doesn’t receive them. As dividend income received by onshore investment bond life funds is free from corporation tax.

What that means is the overall tax paid by a UK equity life fund could be significantly lower than the BRT credit given.

For example, a HRT investing in a UK equity fund through an onshore investment bond would have no on-going tax liability and, if they are a BRT on encashment, pay no further tax

REVIEW, REVIEW, REVIEW

As always, whenever the government present a new change in the rules, designed to catch the complacent napping, now is the time to wake-up and take action.

You may have been under the tax-allowance prior to April 2018, or just wish to make sure that you are taking advantage of all the tax breaks available. Whatever your motivation, a review of your individual position can only ever be a good thing.

Now is the time to contact your adviser regarding the changes that are coming. As always, here at Bridgewater Financial Services we are here to help. If you would like one of our dividend taxation experts to look at your tax position, then please get in touch on 0161 637 2191 and arrange a consultation.

REMEMBER – April will be here before you know it!

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