Category: Capital Gains Tax

The Chancellor’s Autumn Budget 2017

The Rt Hon Philip Hammond MP

Following a turbulent few months across The Palace of Westminster, with a call for more spending and a more aggressive approach to growing the economy, the Chancellor’s budget was largely seen as a business as usual approach, albeit within the ever-present shadow of Brexit.

So now that Philip Hammond has had his day in Parliament, let’s see what kind of impact it’s going to have on yours.

Well firstly, there were no significant announcements regarding tax or pension changes. Nor was there anything that set the markets alight, or sent them into free-fall. In fact this market apathy was manifested in the non-movement of the FTSE 100, Benchmark 10 year Government bond or guilt and with the pound largely static during the Chancellors hour-long delivery.

What the Budget might mean for you

INCOME TAX

Your personal income tax allowance is set to rise to £11,850 for the fiscal year 2018-19 throughout the UK apart from Scotland. As Scotland will set its own personal tax threshold, should it choose to, in the Scottish budget due on 14 December.

The higher rate of income tax in the UK will rise to £46,350 for the fiscal year of 2018-19. Again with the exception of Scotland, who may address this in their impending budget.

STAMP DUTY

First time buys will not have to pay Stamp Duty on properties up to a value of £300,000, which would also see those buying properties up to £500,000 paying no stamp duty on the first £300,000. A move that should benefit 95% of first time buyers

PENSIONS

The pensions lifetime allowance will rise in line with the consumer price index to £1.03Million. One highlight for pensions is that there will be no changes in the pensions funding limits, with the annual allowance remaining at £40,000 and not tapered until adjusted income exceeds £150,000.

ISA’s

The Junior ISA limit is set to rise to £4,260. Whilst the overall ISA limit will stay at £20,000 of which £4,000 can be paid into a LISA (for those eligible).

CAPITAL GAINS TAX

There will be a £400 increase in the capital gains tax allowance, seeing the threshold rise to £11,700.

INHERITANCE TAX

The nil band rate for inheritance tax will remain at £325,000 until April 2021, with the residence nil rate band increasing from £100,000 to £125,000. Which means that, in the future, couples can leave assets up to £900,000 to future generations free of inheritance tax liability.

TRUST

Although no specific details were announced, there is a planned consultation, to be published in 2018, which will consider the simplification and fairness of trust taxation.

STOCKS

The UK Stock Market was largely indifferent to the Chancellors speech. In fact, when he stood up to speak the FTSE100 was trading at 7,448 and when he sat down an hour later, it was largely unchanged.

The real movement in the market came about through the changes in Stamp Duty. With large house builders witnessing their shares drop between 1% and 3%. Possibly reflecting some disappointment in the detail of the chancellors £44 Billion Housing Package, along with the lack of an extension to the popular Help to Buy scheme, compounded with an investigation into the speed at which permitted land banks see the building of new homes taking place.

In true Stock Market traditions, where the tide goes out for one group, in it comes for another.
With the increase in the Stamp Duty it is widely believed that we will see a reinvigoration of the housing market, as well as the driving up of house prices. All this leads to higher profits for Estate Agents and, as a consequence of that, national chains saw an increase in the value of their share price.

CURRENCY MARKETS

The downgrade in the UK’s GDP growth forecast for the next three to four years, along with the rest of the budget, went through without any real reaction from the currency markets. With Sterling ending the budget in much the same place as it started against the Euro and Dollar.

2017 BUDGET SUMMARY

All in all, the Chancellor delivered a steady budget, without any radical changes to the landscape. As always, if you have any questions regarding a specific area of the budget, or your own personal circumstances, then please don’t hesitate to get in touch, where we will be happy to help you in any way.

Tax Year End Planning Checklist

With three weeks left until the tax year end, it’s time to review your finances and check whether there are any actions you can take to make your current and future tax position as efficient as possible. As every year the key date is 5 April, and as always we provide a tax year end planning checklist to guide you through the main optimisation opportunities, which you can find below.

Income Tax and National Insurance

If you have some control over the size and timing of your income, e.g. you are self-employed or own a company, there may be opportunities to optimise your income tax and NI bill, such as delaying an invoice or finding the right combination of salary and dividends.
The main income tax and NI figures for 2016-17 are as follows:

  • £5,824 (£112 per week, same as previous year) = Lower Earnings Limit – minimum to qualify for State Pension and other benefits
  • £8,060 (£155 per week, also unchanged) = Primary Threshold for employee’s NI (12%)
  • £8,112 (£156 per week, also unchanged) = Secondary Threshold for employer’s NI (13.8%)
  • £11,000 = Personal Allowance – basic rate income tax (20%) applies above this amount
  • £32,001 = higher rate income tax (40%) kicks in

All the various rates, thresholds and allowances for this and the next tax year are available on this page on gov.uk.

Dividends

If you have the option, make sure you use your tax-free dividend allowance, which is £5,000 for both 2016-17 and 2017-18 (it will go down to £2,000 in 2018-19, as Chancellor Philip Hammond revealed in his last week’s Budget speech).

Beyond the allowance, dividends are taxed at 7.5%, 32.5% and 38.1%, respectively, for basic, higher and additional rate taxpayers. The taxable amount includes dividends you receive from your own company, as well as any other investments you directly hold, such as shares or funds. It excludes dividends received within tax wrappers such as your pension or ISAs – powerful tax planning tools which certainly deserve your attention before tax year end.

Pension Contributions

The annual pension contribution allowance remains the same as last year at £40,000 for most taxpayers, but for high earners it is tapered at a rate of £1 for every £2 you earn above £150,000, up to £210,000 (as a result, above £210,000 the pension allowance is fixed at £10,000). HMRC provides official guidance here.

Keep in mind that you can also use any unused allowances from the three previous tax years, as long as your total contributions stay below your earned income for the current year. You should also keep an eye on the Lifetime Allowance (LTA), currently at £1 million.

5 April 2017 also marks the deadline for Individual Protection 2014, which allows you to get a higher personalised LTA as a compensation for the April 2014 LTA reduction (LTA was cut from £1.5m to £1.25 in April 2014 and further to £1m in 2016). We have covered this in detail last month.

ISAs

Besides pensions, ISAs are some of the most effective ways to save for retirement and the trend in the recent years has been towards higher allowances and more flexible rules. The range of products and investment options available under the ISA scheme has been expanding. You can invest in the traditional cash ISAs, stocks and shares ISAs and the recently introduced innovative finance ISAs.

The annual ISA allowance for 2016-17 is £15,240 (it will go up to £20,000 next year). Unlike in the past, if you have made any withdrawals during the year, it is now allowed to put money back in without reducing your allowance (provider and product specific rules may also apply).
In any case, the deposit must be made by 5 April, otherwise this year’s allowance is lost. Note that some ISA providers can take several working days to process deposits – make sure to send the final deposit at least a week before the tax year end to avoid disappointment.

Capital Gains Tax

Outside an ISA or pension, capital gains tax (CGT) normally applies when you sell an investment at a profit, with the rates being 18% and 28%, respectively, for basic and higher rate taxpayers. There is an annual CGT allowance, making the first £11,100 of capital gains tax-free. Like the dividend allowance or the ISA allowance, it is use it or lose it, and can’t be transferred to following years.

If you are holding investments with unrealised capital gains, you may want to sell and reinvest part of them in order to use the CGT allowance and reduce the tax bill in future years. You can also reinvest the proceeds in an ISA (a “Bed and ISA” transaction), which effectively earns your investments a tax-free status going forward. Of course, transaction costs apply and may outweigh the tax benefit. Taxes are only one of the many things to consider when deciding your investment strategy and actions.

Inheritance Tax and Gifts

If you have a large estate and inheritance tax (IHT) is a concern, you should also consider maximising your annual allowance for tax-free gifts (called the annual exemption). You can give up to £3,000 a year to your beneficiaries and, if you continue to live for at least seven years, the gift is out of your estate and free of IHT.

More Information and Help

Tax planning is obviously a very complex area and the above are just the main points which apply to most taxpayers. Depending on your circumstances, there may be other opportunities available to you. If you need more information concerning the above listed issues or need help with your particular situation, please do not hesitate to contact us.

Understanding Property Capital Gains Tax in 2016/17

Since April British investors enjoy some of the lowest capital gains tax (CGT) rates among developed nations, following the decrease from 18% to 10% and from 28% to 20% for basic and higher rate taxpayers, respectively. However, this does not apply to residential property where the old rates (18% or 28%) still apply. Property taxation has been a sensitive issue in the last years due to the large number of taxpayers affected, large amounts of money (and tax) involved and Britain’s notorious housing shortage. As a result, the rules are quite complex and hard to understand to many. Let’s put some clarity into them and their implications for your financial and tax planning.

How CGT Works for Most Investments

When you sell investments such as shares or funds (held outside a tax wrapper like a pension or ISA), your gain (selling price less purchase price) is subject to CGT of 10% (if you are a basic rate taxpayer) or 20% (if you are a higher or additional rate taxpayer).
There is an annual CGT allowance, which is independent of (in addition to) your personal income tax allowance and lets you earn the first £11,100 (for 2016/17) of capital gains tax-free. Beyond that amount the CGT rates apply.

Residential Property

The general mechanism is the same with residential property, but there are a few specifics worth knowing.
The rates remain at 18% and 28% – effectively there is now an 8 percentage point surcharge on capital gains made on residential property vs. other investments. When announcing the changes in the 2016 Budget, the former Chancellor George Osborne stated that the intention was to create an incentive for people to invest in businesses (and help grow the economy) rather than property (and help grow property prices).
The CGT allowance applies to property in the same way as to other investments. Therefore, if you have made capital gains on both property and other investments in a given tax year, it makes sense to first use the allowance on the property portion to save a higher amount of tax.
With property there are generally more opportunities to deduct costs when calculating taxable gains. You can deduct transaction or administrative costs such as estate agent’s and solicitor’s fees. You can also deduct the cost of improvements which increase the value of your property, such as extensions, but not the cost of regular maintenance or decorations.

Private Residence Relief

If you are selling your own home (“your only or main residence”), or part of it, chance is you won’t have to pay CGT. This is covered by the so called Private Residence Relief. The rules what qualifies are quite complex, but the key points are the following:
You must have lived in the property the entire time, with some exceptions, such as a short period at the beginning (to allow time to prepare the home and move in) or when you had to live elsewhere due to employment duties.
It must have been your main residence. Second or holiday homes don’t quality and are always subject to CGT. Also note that if you are married or in a civil partnership, you can’t have a different “main residence” than your partner, unless you are separated.
It can be a house, flat, houseboat or fixed caravan.
It also includes the grounds, such as a garden and any buildings on it, but not larger than the “permitted area” (0.5 hectares or 5,000 m2 including the buildings). Any part beyond that does not qualify for the relief.
Any part of the property must not have been used exclusively for business purposes at any point of your ownership period.
You have not let part of the property to others at any time, except when having a single lodger.
You can find detailed official information, as well as some examples, on gov.uk.

CGT Liabilities for Non-Residents

Keep in mind that being an expat or non-resident in the UK is no longer a way to avoid CGT duties. Since April 2015 British expats and non-residents who have sold or disposed of UK property are required to report this to HMRC and CGT is payable on gains made after 5 April 2015.
You must inform HMRC even if there is zero tax to pay. The deadline is quite harsh – 30 days after the ownership transfer date.

Conclusion

Taxpayers often underestimate the importance and potential of CGT in their tax planning. Unlike regular income, such as salary, you often (though not always) have more control over the timing of your investment sales and which tax year the particular capital gains are attributed to.
The first rule is to try to use the CGT allowance in full every year.
The second rule is to take advantage of tax wrappers like pensions or ISAs, or other ways to reduce or defer your CGT liability, depending on your circumstances.

CGT and Dividend Tax Changes: Time to Review Your Strategy

The new tax year has brought important changes in the ways investments are taxed, including a considerable reduction in Capital Gains Tax (CGT) and a complete overhaul of dividend taxation. The scope of these changes merits a review of your investment strategy and portfolio structure. Although the conclusion for many investors will be that no action needs to be taken, make sure your investments remain tax efficient under the new regime.
Dividend Tax Changes
Let’s start with dividend tax changes, which have been known for some time and finally came into effect on 6 April 2016. Under the old system, which involved the somehow confusing 10% notional tax credit, effective dividend tax rates for basic, higher and additional rate taxpayers were 0%, 25% and 30.6%, respectively. On 6 April the notional tax credit was abolished and a new £5,000 dividend allowance was introduced, making the first £5,000 of your dividend income entirely tax free, regardless of your tax bracket (this is on top of any tax-free dividends received under a tax wrapper such as an ISA). At the same time, the rates applying to dividend income beyond the first £5,000 have increased by 7.5 percentage points. The new dividend tax rates for basic, higher and additional rate taxpayers are 7.5%, 32.5% and 38.1%, respectively.
In sum, these changes will result in most taxpayers paying more in dividend tax. The only exception is higher and additional rate taxpayers with relatively small dividend income, who might pay less tax overall thanks to the new allowance (even if your dividend income is a bit higher than the £5,000 allowance, e.g. £7,000, the average effective tax rate might still be lower than under the old regime).
Capital Gains Tax Reduction
While the dividend tax changes have been rather mixed, the changes in CGT, quite surprising and only announced in the 16 March Budget speech, are clearly positive. Effective from 6 April 2016, CGT rates fall from 18% to 10% for basic rate taxpayers and from 28% to 20% to higher rate taxpayers. Most taxpayers can benefit from the annual CGT allowance, which makes the first £11,100 of capital gains free of CGT (the amount for this year is the same as in 2015-16).
Income vs. Growth
In light of the above, the simple conclusion could be that taxation of capital gains has become lower, while taxation of dividends has become less favourable for most. Does this mean you should restructure your portfolio? Should you increase the weights of growth stocks (which tend to pay lower dividends and deliver most of their returns in capital gains) and sell some dividend stocks? If you invest in funds, should you change your focus from income funds to growth funds?
These are valid questions and you should be asking them, but keep in mind that the tax treatment of investments is only one of the many factors you should be considering when deciding your asset allocation and portfolio structure. There are many other factors, with some of them more important (and with much bigger potential financial consequences) than taxes – such as risk and diversification. To conclude, be prepared to make adjustments to optimise the tax position of your portfolio, but selling all income stocks and going all growth is probably a bad idea.
ISAs, Offshore Bonds and Other Options
Importantly, the above applies to direct investments in stocks or funds, but does not necessarily apply to investing via wrappers such as pensions, ISAs or offshore bonds. Particularly the latter has often been mentioned as an alternative in reaction to the dividend tax changes. While relatively simple (and completely legal and transparent, in spite of the “offshore” word), an offshore bond allows you to defer and reduce taxes payable, which may substantially enhance net return in the long run.
If your portfolio is relatively small, you are covered by the dividend and CGT allowances and probably don’t need to worry about taxes. However, with a larger portfolio and/or a longer time horizon, tax issues become a concern. Most people underestimate the effect taxes have on returns when compounded over longer periods of time.