It’s not long until UK chancellor Jeremy Hunt unveils his Spring Budget and while it is not predicted to signal anywhere near as dramatic fiscal shift as last year’s “mini-budget” from predecessor Kwasi Kwarteng, there are several expected changes to be aware of, none more so than those surrounding capital gains tax (CGT).
CGT is a relatively modern tax compared to income tax and inheritance tax, first introduced in 1965 by chancellor James Callaghan. There have been numerous changes to this levy over the years and the current system for higher or additional rate taxpayers, containing an annual exempt amount (AEA) of £12,300 and highest rates of 20% and 28% (for shares/funds and residential property/carried interest, respectively) is historically generous.
Expected changes
The possibility of significant changes to CGT has hung over several recent budgets, in part due to Office of Tax Simplification CGT reviews in 2020 and 2021. These were commissioned by then chancellor Rishi Sunak, who concluded in November 2021 that only technical and administrative issues should be carried forwards.
Jeremy Hunt went further in this regard in his 2022 Autumn Statement, seeing CGT as an area to target in his bid to cut the UK’s deficit and restore confidence in public finances. This took the form of plans to significantly reduce the AEA amount, cutting it to £6,000 in the 2023/24 fiscal year and £3,000 in 2024/25. This will roughly halve the allowance in the next tax year and halve it again in the following year.
Although the move makes CGT tax more stringent, the planned changes stop short of some of the measures feared by proponents of the current system. The CGT exemption on disposal of principal private residences remains in place, there was no uplift in the levy on death and tax rates continue to be substantially lower than income tax. It’s perhaps natural to focus on the disappointment of the announced changes rather than tax breaks that remain, but the new system is not as aggressive as some may have feared.
The annual exempt amount for dividends is also set to be reduced, from the current £2,000 level to £1,000 for the next tax year. This planned halving is another step in tightening this allowance which was previously £5,000 until April 2018.
The tax rate on dividends will remain unchanged with basic rate taxpayers paying 8.75%, higher rate taxpayers 33.75% and additional rate taxpayers 39.35%. All of these remain lower than equivalent income tax rates.
The role of planning
Given the scale of these changes there is greater scope for active planning, although it must be stressed that there is not a one-size-fits-all optimal solution, and differing individual circumstances mean the best actions will vary on a case-by-case basis.
It should also be noted that minimising tax payments is not always beneficial, in particular if it means missing out on better investments – it should not become a case of the tail wagging the dog.
In general, these planned reduced allowances effectively mean that the bar to triggering tax charges has been lowered. Tax charges can be triggered in several ways. An active decision from a client, such as making withdrawals, could lead to capital gains tax. Trading and growth returns as a result of positive investment performance would trigger CGT and/or dividend tax, depending on how these gains are realised. However, it is preferrable to be subject to taxation on gains rather than no tax on losses.
The lowering of the allowances will likely mean more people are required to file tax returns, declaring capital gains or dividends to HMRC.
For dividend income tax, you can contact HMRC directly and ask them to adjust your tax code, or you can complete a self-assessment tax return online or by post. For capital gains tax, you can use HMRC’s ‘real time’ Capital Gains Tax service online or complete a self-assessment tax return.
If you have any queries in light of these planned changes or would like to discuss them in more detail, please don’t hesitate to get in touch with your Financial Planner. If you do not currently have a Financial Planner, then please contact: QCFPadvice@quiltercheviot.com.