The Capital Gains Tax cut – what does it mean for you?

George Osborne’s recent Budget saw a welcome reduction in Capital Gains Tax (CGT), as part of a series of reforms designed to encourage investment in business, rather than property.

From April 6, the top rate of tax on investment gains has fallen from 28 to 20 per cent, which the chancellor anticipates will save business investors a combined £2.7 billion in tax over the next five years and “put rocket boosters on the backs of enterprise and productive investment”.

What does it mean for investors?

CGT is payable on profits arising from the sale of assets such as properties and company shares, excluding primary residences, with a CGT annual exemption ensuring the first £11,100 of gains are free of tax (current 2016/17 tax year rates).

Although property landlords and owners of multiple homes will be unable to benefit from the changes (the top CGT rate remains at 28 per cent), the move does represent an expansion of potentially valuable relief for investors.

In short, the changes now mean that Britain has one of the lowest rates of CGT in Europe; for a £25,000 gain, a higher rate or additional rate taxpayer would previously have been left with £21,108, when the £11,100 CGT annual exemption is factored in, but this has now increased to £22,220, representing a tax saving of £1,112.

The changes mean many investors are reconsidering the balance of their portfolios, especially with the move to the new system of higher dividend taxation being simultaneously introduced: whereby the first £5,000 of dividend income is effectively tax free, with the excess being taxed at a 7.5 per cent higher rate.

Investors with share portfolios may now see lower income tax exposures on their dividends, as well as lower CGT on share disposals. Careful planning will be needed, and it very much depends on the make-up of an individual’s shareholdings, but some may wish to consider changing from income-producing to growth-producing shares, whilst others may choose the opposite.

What about business owners?

Most business owners should qualify for Entrepreneurs’ Relief (if they hold at least five per cent of the company shares) and so the reduction in CGT from 28 per cent to 20 per cent should have little impact. But the new higher dividend rates will have a significant effect and, as the changes took effect from April, the window of opportunity to accelerate dividends from this tax year to the last one has now passed.

The most efficient option for business owners is still to extract profits by taking a lower salary and higher dividends. Despite the increase in dividend tax, there are still clear savings to be had in taking profit by way of dividend – it’s just that those savings are now a little more diluted compared to last tax year.

But it is important to remember there are certain tax thresholds to be wary of crossing that can significantly increase your tax exposure. Business owners can often control their income levels, which means they are well placed to plan around those income thresholds.

For those who earn more than £50,000, child benefit allowance can be affected, while anyone earning £100,000 will see their personal allowance fall by £1 for every £2 that their total income exceeds £100,000, meaning the personal allowance is lost completely once income tops £122,000. Also, the tax rate for those with income over £150,000 sits at 45 per cent, having a further effect on income and tax permutations.

With so much criteria potential affecting the amount of tax you pay, effective planning is essential to maximise your income, especially for business investors who now have the added boon of the Capital Gains Tax decrease and business owners who have the increase in dividend tax.

Our team of experts can help you to manage your money and ensure that changes to tax legislation do not catch you out.

Get in touch with us to see how changes to capital gains and dividend tax rates could affect you and find out how we can maximise your potential income.

Garbutt + Elliott – Accountants in York and Leeds – enquiry@garbutt-elliott.co.uk – 01904 464 100