Planning for the reduction in the Dividend Allowance

We are used to tax reliefs being changed when a new government comes into power but it is more unusual to see a tax relief being created and then severely cut by the same government within a two year time period.

In April 2016 higher rates of taxes on dividends were introduced but with a £5,000 ‘tax-free’ Dividend Allowance to compensate. Despite the rise in rates, many taxpayers, particularly higher rate taxpayers, found themselves better off. For example, for an individual with a £150,000 share portfolio yielding 3%, no tax would be payable on the £4,500 income produced whereas in the pre April 2016 regime there would have been a tax liability of 25%. The announcement by the current Chancellor, Philip Hammond, to reduce the Dividend Allowance to £2,000 from April 2018 will put paid to that amount of benefit.

However there is time to mitigate the effects. If your portfolio yields an average 3%, approximately £67,000 will be protected from income tax. If your portfolio exceeds this figure, consideration needs to be given to transferring some shares to a spouse or a civil partner. Equity ISAs should also be one of the first things to consider. By investing the maximum £20,000 into an Equity ISA now with a further £20,000 on 6 April 2018, protection can be given for £40,000 of a portfolio. For a married couple or civil partners, that figure doubles to £80,000.

Your existing shares can be sold and bought back again within the ISA wrapper but one needs to choose carefully which shares will be sold as the transactions will be disposals for capital gains tax (CGT). There are also two lots of annual exemption from CGT to potentially make use of – this year and next. The current annual exemption is £11,300. Married couples and civil partners also have the added facility to make transfers to the other partner prior to selling into an ISA. Any share transfer between such couples is at a ‘no gain no loss’ price with the result that the transferee will effectively acquire the shares at the transferor’s base cost and so will make the gain in selling the shares.

Please do contact us if you have any queries.