We expect to see changes to tax reliefs when a new government comes into power. We don’t expect to see a government severely cut a single tax relief just two years after introducing it. Yet that is just what we have seen happen to the Dividend Allowance.
Higher rates of taxes on dividends paid to company directors came into effect from April 2016. To lessen the blow of the tax rises, a £5,000 ‘tax-free’ Dividend Allowance was also introduced.
Many taxpayers, in particular higher rate taxpayers, actually found they were better off under the new rules. For example, an individual with a £150,000 share portfolio yielding 3%, would not have to pay any tax on the £4,500 income produced. Before April 2016, they would have been liable for tax at a rate of 25%. Subsequently, Chancellor Philip Hammond announced that the Dividend Allowance will be cut to £2,000 from April 2018, effectively putting paid to that amount of benefit.
Time to make a plan
There is still time to plan ahead to mitigate the effects of the reduction in the Dividend Allowance. If your portfolio yields an average 3%, approximately £67,000 will be protected from income tax. If your portfolio exceeds this figure, you may wish to consider transferring some shares to a spouse or a civil partner.
Investing in Equity ISAs may also be a suitable option. An investment of the maximum of £20,000 into an Equity ISA now, with a further £20,000 on 6 April 2018, will protect £40,000 of a portfolio. For a married couple or civil partners, that figure is doubled to £80,000.
Selling your shares – be mindful of Capital Gains Tax
You could also sell your existing shares and buy them back again within the ISA wrapper. Keep in mind when deciding which shares to sell that the transactions will be disposals for capital gains tax (CGT).
You potentially have two opportunities to make use of annual exemption from CGT – this year and next. The current annual exemption is £11,300. Married couples and civil partners can also make transfers to the other partner prior to selling into an ISA. Share transfers between such couples are at a ‘no gain, no loss’ price. In effect, this means that the transferee will acquire the shares at the transferor’s base cost and so will make the gain in selling the shares.